TLDR: Season of change: Is the start-up funding winter about to end?

VCs in India are shifting their focus to unit economics as green shoots in funding activity emerge, indicating a potential end to the funding winter. The total market capitalisation of VC-backed Indian public companies surpassed $50 billion in 2023, but the share of global VC investments into India dropped to 3.3% from 5.5% in 2019. Global macro events, such as the conflict in Ukraine and rising inflation, have made investors cautious and directed their attention towards profitable or profit-focused start-ups. Deal volumes reduced by 56% in 2023 compared to 2021, and start-ups have laid off more than 15,000 jobs. Despite the challenges, there are signs of optimism, with green shoots emerging in later-stage funding and a substantial increase in dry powder available to VC firms.

Key Points:

• VCs in India are focusing on unit economics as green shoots in funding activity emerge, potentially signaling the end of the funding winter.
• The share of global VC investments into India dropped to 3.3% in 2023 from 5.5% in 2019.
• Investors are directing their attention towards profitable or profit-focused start-ups and are emphasizing corporate governance and internal controls.
• Deal volumes reduced by 56% in 2023 compared to the previous year, and start-ups have laid off more than 15,000 jobs.
• There are signs of optimism, with green shoots emerging in later-stage funding and a substantial increase in dry powder available to VC firms.

VCs in India are shifting their focus as the start-up funding landscape undergoes a potential turning point. While the total market capitalisation of VC-backed Indian public companies exceeded $50 billion in 2023, the share of global VC investments into India declined to 3.3% from 5.5% in 2019. This decline in global investment can be attributed to global macro events, such as the conflict in Ukraine, rising inflation, a spike in interest rates, and the lackluster performance of tech stocks in public markets. These events have made investors jittery and cautious.

As a result of this cautious environment, VC investors are now prioritising companies that exhibit disciplined control over cash burn, prioritize cash conservation, and engage in judicious hiring practices. Profitable or profit-focused start-ups are preferred over those that aggressively chase growth. Discussions on corporate governance and internal controls have also become integral components of deal negotiations and due diligence processes.

This shift in focus has led to a decrease in deal velocity across sectors, with the time period for an average deal to be sealed increasing by as much as 60-70%. Deal volumes reduced by about 56% in 2023 compared to 2021, and deal value dwindled to one-fifth of its 2021 peak. These challenges have resulted in mass layoffs, with start-ups axing more than 15,000 jobs in 2023.

Despite these challenges, there are signs of optimism in the start-up funding landscape. Green shoots are emerging, particularly in the later-stage funding landscape, with substantial rounds being raised by companies such as Lenskart, Udaan, Zepto, and GreyOrange. Investors with deployable capital are waiting for high-quality companies in the later stages that are ready for IPO or wanting to raise $100+ million rounds.

While the funding winter may not be completely over, there is hope for a turnaround in funding dynamics. These challenges have prompted VCs to reconsider and revamp their strategic approaches, emphasizing a shift from late-stage to early-stage investments. Founders continue to embrace optimism and confidence in the potential of the start-up ecosystem, with the belief that the next five years will usher in record-breaking levels of IPOs and M&As.

In conclusion, while the start-up funding winter may not be completely over, there are signs of optimism and potential for a turnaround in the funding landscape. VC investors are shifting their focus to profitable or profit-focused start-ups, with an emphasis on corporate governance and internal controls. While challenges remain, resilient start-ups and steadfast investors are poised to navigate through and come out stronger, signaling the comeback of prosperous times in the start-up ecosystem.