Funding into Indian startups declined by over 70% during the January-March quarter as investors continued to ask founders to prioritise profitability over revenue growth. Data compiled from Tracxn showed the fall in capital infusion during the first three months of the year was despite at least two large-ticket deals at PhonePe and Lenskart ($200 million and $500 million, respectively) closing in March itself.

PhonePe alone raised a total of $650 million in the first quarter of the calendar year. In other large-ticket deals, FreshToHome raised $104 million in a round led by Amazon Smbhav Venture Fund, Mintifi picked up $110 million led by Premji Invest, and KreditBee mopped up $120 million from Advent International and others.

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Despite that, startups raised a total of $3.83 billion in equity funding in January-March, about 72% lower than $13.8 billion they had collectively raised in the same period a year ago.

The total fundraise of $3.83 billion was even lower than $7.62 billion startups had raised in the same quarter in 2021 and also the $6.93 billion new-age firms mopped up in the January-March period of 2020. Even in 2019, during the same period, startups had raised more money (around $5.45 billion).

The funding environment is likely to remain tepid even in the remaining months, according to Shripati Acharya, managing partner at Prime Venture Partners. “Investors are now talking about Ebitda, profitability, visibility and the likes, a language very different from what they spoke in 2021 and 2022. And that requires companies to change their tactics mid-flight, from growth-oriented to focus on profits, to be able to get follow-on investments. But that shift is not going to happen easily and large-ticket rounds are going to be very difficult and few,” Acharya said.

The outlook comes after late-stage funding has already been on a constant decline since at least Q4CY21, when late-stage companies raised a total of $14.9 billion, which fell to $9.31 billion in Q1CY22, then further to $8.92 billion in Q2CY22. From there, it dropped to a mere $2.73 billion in Q3CY22, where it nearly plateaued when late-stage startups raised a total of $2.7 billion in Q4CY22, which further reduced to $2.51 billion in Q1CY23.

Late-stage firms raising lesser capital also has a ripple effect on seed and early-stage ones, which were largely immune to the funding slowdown until late last year. Seed and early-stage companies together raised only about $1.2 billion in Q1CY23, sharply lower than around $3.7 billion they had raised in the year-ago period. The total capital raised in Q1CY23 was lower even on a quarterly basis. In Q4CY22, seed and early-stage startups had raised over $1.3 billion, which was already a fall from over $2.2 billion in Q3CY22, again lower than $3.7 billion raised in Q2CY22, data showed.

The drop in funding, especially in the early-stage firms, was because several smaller startups either shut shop or sold their business to larger players, resulting in fewer startups now versus last year, according to Acharya. “Seed and early-stage investors will now only invest in companies that show that they can raise additional capital at a later stage, but late-stage funding drying puts pressure on early-stage companies,” he said.

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“So, the tourist entrepreneurs have now left. There are lesser people leaving Amazon and Flipkart to start up this year versus last year when capital was in abundance. So, as the bar for seed stage goes up, the number of companies that qualify goes down,” Acharya added.

Venture capital firms tightening their purse strings has also resulted in no unicorns, or startups valued at or over $1 billion, being minted in the past six months or so, as reported earlier. This was the longest gap in the last seven years, according to data from Tracxn.

This came after the number of startups turning into unicorns had already reduced by 50% year-on-year to 23 in 2022. This was also a sharp decrease from 2021, when one unicorn was being minted roughly every week, with 44 being born during the year.