Indian Startups to Face More Pain as Funding Crunch Worsens

Indian Startups Struggle.

Investors Reckon with Stretched Valuations and Slow Growth.

Startups in India have been facing a funding squeeze in recent months, which has led to layoffs and delayed stock listings. According to data firm CB Insights, startups in India raised just $2 billion in the first quarter of 2023, a 75% decrease from the same period last year and the smallest quarterly number in nearly three years.


This slowdown is likely to worsen as investors reckon with stretched valuations and faltering consumption growth, leading to industry consolidation. The funding environment for Indian startups has been challenging in recent years, and this trend seems to be continuing in 2023.


At this run rate, startups may end up raising less than $10 billion this year, which is a far cry from the record $30 billion garnered in 2021 and $20 billion in 2022. This trend is a setback for startups as well as Prime Minister Narendra Modi, who has lauded their success by calling such companies the “backbone of new India.”

The funding squeeze could also hurt India’s economic growth and its jobs market. The slowdown in funding is a fundamental reset for Indian startups, and it is unlikely that we will see another record fund raise year like 2021 for at least a decade, according to Sequoia Capital.

The prospect of fast-rising consumption both offline and in India’s digital space helped many startups clock multi-billion-dollar valuations in recent years, with the likes of Sequoia and Tiger Global betting big on businesses that burnt cash to lure consumers in the country of 1.4 billion people.

However, global factors such as high rates and inflation have weighed on the investment climate in India and elsewhere. Startup funding in the US dropped by around half to $32.5 billion in the first quarter, while in China, it fell 60% to $5.6 billion.

Indian startups, which are far more reliant on foreign capital than global peers, have seen a more severe squeeze, which some executives say is also partly due to investors realizing that they misjudged consumption growth.

According to Indian VC firm Blume Ventures, consumption outside the top 30 million Indian households dropped sharply, and it is driven by a “tiny superuser set.” Despite India’s billion-plus population, food-delivery company Zomato has just 50 million annual transacting users, and state-backed digital money transfer service UPI is used by just 260 million, the report said.

This has led to investors and regulators raising questions on whether valuations of many startups were unrealistic.

Since the flop listing of loss-making digital payments firm Paytm in 2021, investors and regulators have been questioning whether valuations of many startups were unrealistic. There are only 271 Indian startups that raised funding in Q1 2023, compared with 550+last year.

Startups in India are facing a funding squeeze, which is likely to worsen in the coming months. Investors are reckoning with stretched valuations and faltering consumption growth, leading to industry consolidation.

This slowdown is a setback for startups, the economy, and the jobs market in India. It remains to be seen how startups in India will adapt to this new funding environment and whether they will be able to bounce back in the coming years.


Leave a Reply

Your email address will not be published. Required fields are marked *