VC funding to Indian start-ups drops to lowest level since Q1 2020: Report

Flow of venture capital money into Indian start-up ecosystem has hit the lowest level since early 2020 when pandemic-induced lockdowns slowed down start-up funding like never before. 

Start-ups in India received $2.9 billion of VC money in the July-September quarter, marking a 66 per cent decrease from the second quarter of 2022 and an alarming 81 per cent drop from the same quarter last year, reveals a new report by start-up and VC data platform Crunchbase. 

Also read: September Slowdown: Startup funding plunges 83% year-on-year, only 2 unicorns added

This is the lowest since the first quarter of 2020 when, as per KPMG’s Venture Pulse report, start-ups raised just $2.2 billion. Private equity and venture capital activity in the Indian start-up ecosystem saw historical growth since then with the year closing at an all-time high of $77 billion of private capital being absorbed by Indian firms, as per an IVCA-EY report. 

According to the Crunchbase data, number of deals has not gone down drastically – with just 12 per cent quarterly and 32 per cent yearly drop – indicating investors are staying away from large deals. Late-stage funding thinned down 76 per cent to just $1.5 billion in Q3 2022, from $6.2 billion in the second quarter. Late-stage funding saw an 89 per cent decline in Q3 compared to the same quarter last year. 

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The Crunchbase data corroborates a report released by industry tracker Tracxn which said funding in Indian start-ups declined by 80 per cent in Q3 2022 to $3 billion, compared to $14.9 billion in the same period in 2021. Q3 2022 funding also declined 57 per cent sequentially from the second quarter. Late-stage deals suffered the most, with a 70 per cent drop from $142 million in Q3 2021 to $42 million in Q3 2022 as investors tightened their purse strings and increased focus on profitability, Tracxn stated. 

A PwC report too said the start-up funding in India hit a two-year low at $2.7 billion across 205 deals during the third quarter of this calendar year. Funding in growth and late-stage deals continued to decline, with an average ticket size decreasing to $13 million in Q3 CY22 from $23 million in the previous quarter. 

However, there is a silver lining for the industry. As per the PwC report, a record $562 billion of ‘dry powder’ is available and ready to be deployed with venture capital firms globally. The accumulation of this capital is due to market pullback by VC funds that have turned very cautious about their investments. A combination of global macro events including geopolitical crisis, changing monetary policies, soaring inflation across the globe, and the public market turmoil has led to an increased focus on strong unit economics and the path to profitability.