Will Fundraising Get Tougher In the Second Half Of the Year? Indian startups raised $3.8 bn in H1 2023, lowest half-yearly funding in 4 years, says a latest PwC report

According to a recent PwC report, Indian startups' fundraising stood at $3.8 billion across 298 deals in H1 of 2023, compared to $5.9 billion raised in the first half of 2022. The consulting giant said that fintech, SAAS, and D2C continued to be the most funded sectors in H1 CY23. The report titled "Startup Perspectives - H1 CY23' also said that the amount raised was the lowest half-yearly funding in 4 years.

Last month, we at Entrepreneur India asked some leading investors to share their predictions for the second half of the year, and here is what they said.

Investments ecosystem in the coming months

The investment ecosystem in India has been continuously evolving. The recent shift has been brought in by the global downturn-led funding winter. The winter is in fact being seen more as a behavioural shift in how investors are approaching their investment decisions. "In the last few months, the ecosystem has witnessed significant markdowns in inflated valuations, which has also brought back some rationality to the market and a renewed focus on the path to profitability and sustainable growth for startups. In my experience, some of the best companies are actually born during and after downturns. Startups that are anchored on strong business foundations, positive unit economics, and longer and steady cash runway will continue to thrive," said Sanjiv Rangrass, Venture Partner, Unitus Ventures.

The current correction is forcing both investors and founders to adopt a more rational approach and focus on building businesses that are robust. "This shift towards rational thinking promotes a greater emphasis on building solid foundations, establishing sustainable revenue models, and prioritizing profitability over growth at any cost," he added. .

Will it get tougher in the coming months for startups seeking investment? "It has already been hard for startups to raise for the last 12 months. Hopefully, we're at the peak of the pull-back cycle and VCs and investors will come back in force into strong businesses over the next few months," said Mohit Sadaani, co-founder, The Moms Co.

Amit Lakhotia, founder and CEO, Park+ believes that to a certain extent, it is going to get tougher in the coming months, but businesses that are frugal, agile and are building robust businesses anchored by realistic valuations will be able to raise money, with relative ease. "The Indian startup ecosystem is still in its nascent stage and has immense latent potential," he said.

Most experts believe that the global economic slowdown and the rising interest rates are expected to put a damper on the startup funding market in the coming months as well. "Also, the Indian startup ecosystem is becoming increasingly competitive. This means that startups will need to be more innovative and have a strong product or service in order to stand out from the crowd. In my view, good founders operating in large markets with excellent teams will not have problems raising funds. Even during last year when the market was low, some founders have raised funding rounds to sustain the business," said Shantanu Deshpande, CEO and co-founder, Bombay Shaving Company.

Investors feel that we are past the bottom of startup funding and hence it may be a good time to enter into startups, especially in the early stages, which will form the bedrock for the next wave of unicorns in the coming decade. "Early-stage funding has been on the path to resurgence, as we see that a lot of deals have happened in the past 6–8 weeks. Meanwhile, late-stage rounds have also started to pick up recently," said Kavit Sutariya, general partner, Capfort Ventures. According to Preqin data, private investors, including venture capital and private equity, are sitting on "an enormous pile of cash" but are apprehensive of making big pocket investments. Both PE and VC firms had accumulated $1.96tr in dry powder, or capital waiting to be deployed, by the end of last year, says the report.

Arjun Vaidya, co-founder, V3 Ventures, in fact, is not a big fan of the term, 'funding winter'. "I will lie if I say that the pace of investing is a little slower but, there is a lot of capital available in India. I would argue that India is one of the few countries that is somewhat insulated from this global downturn. Thus, good businesses in India will still attract a serious amount of capital. Long story short – yes it is tougher but yes also to its happening," he said.

Stages to be affected the most

As far as India is concerned, early-stage investing is still strong with competitive deals getting funded. In the later-stage deals, founders are now having to show greater unit economics before getting a cheque. "As we progress this year, Series A and beyond stages will face difficulty as investors look for startups with proven market traction, a scalable business model, and strong growth potential. As startups progress to later stages, the funding landscape becomes more competitive. Investors typically seek startups with solid revenue growth, a clear path to profitability, and the potential to capture a significant market share," said Rangrass, while adding that it's important to note that while funding may be relatively challenging in these stages, there are still opportunities for startups with compelling value propositions, strong execution capabilities, better product-market fit, and a clear understanding of their target markets.

According to Lakhotia, the pre-seed stage funding rounds might be a bit tougher for startups as investors might not be ready to put in money without a robust business model in place. "Additionally, businesses which need large capital infusion to expand rapidly, might end up hitting a rough patch," he said.

Deshpande also feels that when sentiments are down, smaller players are affected most. "Investors are becoming more risk-averse, and are less likely to invest in early-stage startups. Apart from them, the companies in mature industries and high burn rate may find it difficult to raise funds," he said.

Many late-stage startups have been working towards improving their unit economics over the last 12 months, in line with expectations from investors. "Many of them have created solid businesses and we should see them getting funded. Companies that have not fixed these basics will find it harder to raise. At early stages, interest and investment seems to be strong, with high-quality founders and businesses starting up right now," said Sadaani.

While it's difficult to predict for anyone as to when funding for startups across stages will return to normal, given the macroeconomic conditions, investors feel that it's time startups prioritized scalability and demonstrated value to investors.