Indian start-ups face big funding challenge

Two decades after the infamous dotcom burst, Indian start-ups are staring at a grave fund crunch. The global economic slowdown and the plummeting of IT stocks in the US market have created a hostile environment for the new-age companies looking for funds here. After peaking at $17 billion in the July-September quarter of 2021, the funding has lost its momentum and reported a steady decline quarter on quarter. What has crippled the drive is the decision by international investors and venture capitalists to go slow on new deals and commitments amid the raging global slowdown. 

Several large investors such as Tiger Global and SoftBank have significantly pulled back from the market. In October, total funding slipped to $1.34 billion, sharply lower than the $4.2 billion raised by start-ups in the corresponding month last year. The companies that raised money at sky-high valuations in 2021—over 20–25 times their annual revenues—have seen the multiple dwindle in 2022. So far, 2022 has seen a total of $22 billion in funding compared to $42 billion raised in 2021, a blockbuster year with over 1,500-plus deals. 

Edutech major Byju’s is a classic case. India’s highest-valued start-up found itself in trouble and struggled to close the deal it entered into with Aakash Educational Services. Its delayed audited results for 2020–21 threw a shocking surprise, with losses soaring nearly 20-fold to `4,589 crore. The company had to lay off several of its staff. In October, it, however, raised $250 million from its existing investors, with the valuation remaining unchanged at $22 billion. 

Several other edutech and fintech companies faced a similar situation as the number of funding rounds shrank month-on-month in 2022, with a steady fall in average ticket size. It has been a long struggle for them to save their valuations from slipping down. As a start-up investor rightly said, India’s new-age companies ought to prioritise value creation over valuation and chase ‘profit pools’ rather than ‘capital pools’ as they scale up. Certainly, the ‘funding’ winter is unlikely to go away in the next two to three quarters, and it will be a big challenge for several start-ups as they continue to book losses. Some unicorns may see a change in their status with the rupee fall jeopardising their dollar valuations. Some others will have to shed the growing image that they are valued on shaky metrics. The fund crunch and the rupee fall have decelerated the evolution of India’s unicorn club.