Indian start-ups are in the middle of a harsh funding winter and it is still unclear when the cash crunch will end. Large cheque sizes and abundance of capital is history now; a clear path to profitability is now on top of the agenda.
That the funding environment is not very favourable is evident from the fact that even the top performing segments (in terms of funding in 2022) retail and fintech have seen a 57% and 41% YoY decline in funding, respectively, so far in 2022. This demonstrates that even these sectors are not immune to the effects of the funding slowdown.
Education technology startups that had the cushion of venture capital and the screen time of locked-down students through 2020 and 2021 has also seen a decrease in fund flow with schools reopening and students getting back to classrooms.
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“Edtech is another sector that has seen a drop of 39% (in funding YTD) as compared to the same period last year. In the case of edtech, we have seen a decline in demand since schools and colleges started reopening after the pandemic, forcing many edtech players to lay off their workforces to reduce operational costs,” analysts said in the report. “2023 will be worse than 2022 for tech. This is what I keep hearing,” tweeted Gaurav Munjal, founder at the Unacademy Group which is one among many edtech startups to have laid off staff in the recent economic downturn.
Over 7,500 employees, including contracted and full-time, have been impacted by the job cuts by edtech startups in 2022 so far. Besides, five edtech startups – Lido Learning, Crejo. Fun, Udayy, Qin1, and SuperLearn – have also shut their operations this year.
Edtech giant Byju’s said it would let go nearly 2,500, or 5 per cent, of its staff as part of an “optimisation” plan.
Zomato and Oyo have also recently laid off staff as tech firms resort to cost cutting and gear up to navigate a period of uncertainty.
The number of seed-stage rounds has dropped by 38% as compared to the previous year. “It is just a trickle down effect of overall activity which has happened,” Neha Singh, co-founder & CEO at Tracxn told Fortune India. Besides, India added only 23 unicorns so far this year, as compared to 46 being added last year.
Tiger Global Management, one of the world’s most aggressive technology investors, which has backed at least 38 unicorns in India to date, participated in 50 funding rounds of Indian startups in the first 11 months of 2022, compared to 64 in the whole of 2021, according to Venture Intelligence data.
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While the deal count for 2022 is slightly lower than that of 2021, it is significantly higher than that of 2020 and the pre-pandemic years, according to the data.
Data firm Crunchbase found venture capital-backed companies raised only $369 billion for the first three quarters of 2022, a far cry from the whole of last year’s record-breaking feat of $679.4 billion invested globally — which was a 98% increase from the year before that.
Contrary to the negative sentiments in the market, experts are convinced that the funding winter is, in fact, a good thing.
Sanjay Swamy, Managing Partner, Prime Venture Partners, however, is of the opinion that the situation is now normal after an extended funding summer from mid 2020 – end 2021 which was driven by the pandemic and a huge bump up in online adoption.
“In a capitalistic world, where there’s opportunity, there will be capital. In other words, the opportunity is much bigger, and I am very confident that good companies will continue to attract high-quality capital, but others will not,” he said.
Swamy further explains that whenever such cycles arise in the macro, all investors first look inwards and ensure they have a mechanism to shore up existing portfolio companies, try and minimize damage. “Most of those who have seen such cycles are aware that these are also the best times to invest in companies, not just because valuations drop, but more importantly companies can focus on building on strong footing rather than vanity metrics. At Prime, we have been extremely active because founders who brave this phase are likely to be building strong, well grounded companies.”
On startups that can survive the funding winter, Swamy says: The analogy of cockroach startups isn’t the right one! A coiled spring is a better one and we look for these! Companies that don’t have excess burn now, are laser focused on doing one thing really well with limited resources and yet once the opportunity arises, can be unleashed to have explosive growth. The good news is that the macro climate is very positive towards India in the long-run and we expect Indian public markets to be very attractive exit opportunities and we can all go back to sensible company building.”
For raising funds during funding winter 2022, Fintech unicorn Razorpay in its blog writes: Traditionally VC & PE firms were the most popular routes for startup founders to raise capital. In the absence of easy capital due to funding winter, founders are increasingly looking at other underexplored routes such as crowd-funding, venture debt and government schemes for startups.