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How the Funding Winter Has Affected Indian Start-ups

How the Funding Winter Has Affected Indian Start-ups

The dramatic change in the fortunes of India’s start-up ecosystem in recent months has become the cause for much concern in entrepreneurial circles. What exactly went wrong?

From the highs of 2021 to the lows of 2022, Indian start-up ecosystem has seen a dramatic reversal in fortunes. From the highs of 2021 to the lows of 2022, Indian start-up ecosystem has seen a dramatic reversal in fortunes.

The dramatic change in the fortunes of India’s start-up ecosystem in recent months has become the cause for much concern in entrepreneurial circles. Till most of 2021, Indian start-ups were being wooed by the biggest investors in the world—the largest venture funds and private equity players were jostling with each other to grab a share of the Indian start-up pie, pushing several ventures to unicorn status. Such was the frenetic pace of funding in 2021 that the country saw the birth of as many as 42 unicorns in the year, and billion-dollar valuations became the order of the day. Cut to June 2022, and investors and start-up circles are busy talking about what Indian start-ups should do to survive what is being seen as a “harsh winter” for the ecosystem with funding drying up, layoffs being resorted to in large numbers, and pessimism sweeping through the start-up world. What has changed since 2021? A combination of global factors—a downturn in the public markets where tech firms saw their stocks crashing, global inflationary pressures, and the war in Ukraine—has proved to be a dangerous cocktail which is hitting Indian start-ups hard. Alongside, allegations of financial misdemeanours and corporate governance lapses by some start-ups are adding to what is already a mountain of challenges.

With the biggest investors taking a hit owing to the meltdown in global tech stocks in the public markets, funds in the private markets have dried up, leading to serious problems for several Indian start-ups. Harried investors are now taking much longer to complete funding rounds, undertaking rigorous due diligence and insisting on a path to profitability. As a consequence, venture capital deals in India dropped 22 per cent in the first five months of 2022 compared to the preceding five-month period. Late-stage deals have been badly hit, with a 37.5 per cent drop in the value of such deals in the first five months of 2022 compared to August-December 2021. Start-up founders are going back to the drawing board, and also seeking to engage with existing investors to request them for help to tide over the crisis, which most expect to last at least 18 months. In our cover story, Binu Paul takes a close look at all the factors that have caused the Indian start-up story to wobble, and the silver linings—the dry funding powder that remains from 2021, and a new set of large investors looking closely at India.

Start-ups apart, Rajat Mishra gets you the details of the ongoing global economic downturn and its impact on India. This issue also has a special report on sustainability, helmed by Nidhi Singal, with in-depth coverage of how India’s net-zero ambition is playing out across sectors, the corporate success stories, the challenges and the hard data that we need to consider as India moves towards a cleaner and greener future.