The country’s startup ecosystem has been facing a significant downturn in late-stage funding in recent months as investors have become increasingly cautious about pouring money into startups that are yet to show profitability. The ongoing funding winter has been felt by many startups, with late-stage firms particularly struggling to secure funding even when some of them have demonstrated solid growth and potential, investors and analysts confirmed to FE.
According to data from venture capital analytics firm Tracxn, the total value of funds raised by late-stage startups (Series C and above) has reduced by more than 50% year-on-year in CY22 to around $17.2 billion. In CY21, late-stage startups had raised a whopping $34.6 billion. The steep decline in late-stage deals is also due to the fact that CY21 was an extraordinary bull run for startup funding. The number of deals in CY22 also dropped to just around 237, compared with 312 deals in CY21, the Tracxn data showed.
This marks a worrying trend as late-stage funding is critical for startups looking to scale up and expand operations.
However, despite the bull run in CY21, there were early signs of correction in late-stage funding in CY20 when the Covid-19 pandemic hit the country. In CY20, late-stage funding fell by 32% y-o-y to around $8.4 billion, compared with $12.4 billion in pre-Covid times.
Experts believe that the ongoing funding winter is partly due to investors’ concerns about the impact of the pandemic coupled with growing fears of a global recession. In addition, with tech stock correction in both the US and Indian markets, investors are more cautious than ever and are scrutinising potential investments more closely.
Additionally, there is a growing realisation that delayed IPOs and jittery tech stocks will have a greater impact on late-stage funding in CY23.
Mohammed Amaan Memon, investment professional at Ankur Capital, said late-stage funding to a large extent depends on the entire IPO cycle. Since several startups have either not followed up on the DRHPs or delayed IPO, it has become difficult for both investors and startups to pour large amounts in later stages without seeing the path to profitability, he added.
“The public markets act as a kind of mirror for late-stage founders and investors. Since the tech stocks around the world have crashed by 50% and more in some cases, it may not be a good time to go public. Hence, those companies (in India) who have already done a pre-IPO funding round anticipating a public listing may have to extend the same round and look for a bridge funding round to finance their capex,” Aman added.
Apart from fundraising issues, the impact of the funding slowdown on late-stage companies is more pronounced when compared with early-stage firms. Experts point out that many early investors who chose not to exit in the CY21 bull run could be under pressure to seek exits from their late-stage investments. Most of these investors held onto their investments hoping to get cash exits from IPOs, but given the jittery markets, the pressure on founders has just doubled, experts said.
“There is considerable pressure on founders to provide exits not only to their investors but also employees (and ex-employees) who have been holding on to their ESOPs for a long time period. Hence, we can expect some kind of consolidation to happen in companies above the Series C stages if the funding winter continues…especially for those startups that have proven to be growing on a large scale, but now need to go for an M&A for the next leg of growth,” Aman said.
Even for those deals that are being finalised in the late-stage ecosystem, many are unpriced rounds using convertible notes as investors are wary of pricing their holdings during a slowdown, investors pointed out.
“These days very few startups are going public with their deals because it’s either a flat or a down round. There has been an influx in deals that depend on convertible structures to avoid pricing of shares…So, there are very few transactions where there has actually been a valuation exercise,” Ankur Bansal, co-founder and director of debt fund BlackSoil Capital, said.
Bansal further said although many late-stage startups were forced to conduct restructuring and layoffs last year due to the funding winter, the number of such layoffs could continue this year. This is mostly because the layoffs were expected to increase the runway and provide founders with more time to fix their unit economics
“There is only a limited limit amount of layoffs and rationalising can be done, because businesses are built based on a certain cost structure, you cannot keep reducing your human resource to meet runway requirements. After a point of time, the firm’s revenues have to improve or their margins have to increase or raise the next round of funding,” Bansal added.