E-commerce platform Meesho, quick commerce company Zepto and fintech firm Navi are all reportedly in talks to raise around $300 million from investors. If these funding rounds materialise, they will be among the very few large rounds in the last one year. Does this signal that the startup funding winter is giving way to a funding spring?Industry veterans agree things are getting back on track, but what is missing is the irrational exuberance one saw in the past when capital chased startups and cash burn became a fashionable business model.
This means companies with a sustainable approach to growth and profitable unit economics will get a preference over those with a “growth-at-all-cost” approach.“The fundamental question is how much capital can our market absorb in the future,” said Deepak Gupta, general partner at WEH Ventures, an early-stage venture capital fund. He believes that the inflows should grow organically going ahead. “If we keep putting $25 billion into the market every year for the next three years, we will have some serious problems down the road,” he added. An abundance of capital in the market can expand the multiple of companies that do not have a strong business model, just as it did during the funding boom of 2021.
“If the valuations go up too much, and the business model is not there, then they will struggle to raise money. And ultimately, they will not make money for these investors and also not get money again from the LPs. All that will play out over the next five to 10 years,” Gupta said.Some experts say in any case, there was no funding winter for good companies. “They always had enough money to back them. Right now, we are back to reasonable levels of funding,” said Info Edge co-founder Sanjeev Bikhchandani at a recent media event.Most investors view the funding slump as a healthy development in India’s startup ecosystem, where funding is finally climbing down to “normal” levels after the excessive highs of 2021, when lower interest rates, globally, had made capital cheap and easy.
So far in the first quarter of the current calendar year, startups in India have raised $1.6 billion in total funding, marking a drop after three consecutive quarters of rise in funding in previous quarters, according to data from Tracxn. While late-stage funding slumped 46% to $0.67 billion in the first quarter of this year, seed-stage funding saw a minimal decline of 7% and early-stage funding saw a rise of 28%.Lightspeed’s partner Harsha Kumar agrees that the current levels are rather normal for India’s startup ecosystem. “The good part is valuations today are a reflection of where a company is in terms of revenue, performance, etc. But I think the negative aspect of where the market is today is that there’s limited liquidity at the growth stage,” she added.Last year saw several valuation cuts for large startups such as Ola, Swiggy, Byju’s, Pharmeasy, Meesho and PineLabs. In the case of Meesho, the upcoming funding round would value it at $3.9 billion, which is 20% lower than the $4.9 billion it commanded during its previous fund raise in 2021.
Such downrounds, however, should be seen as a healthy correction, investors add.Venture capitalists such as Peak XV’s Rajan Anandan say that the industry should view $10-12 billion a year funding level as the “normal” pace for India going forward, and forget about the excesses of 2021. According to Anandan, India’s annual run rate for investments in startups before the 2021 boom was about $8-10 billion. In 2021 and 2022, funding suddenly jumped to a collective $60 billion.Whatever the level of funding is in the market at present, investors are not keen on bringing back the highs of 2021. “There was never really a funding winter. There was a funding excess… Too much money chasing too few deals at too high valuations,” Bikhchandani said.