With central banks around the world raising interest rates to keep inflation in check and tech stock market capitalization down 50-60% from a year ago, private-market investors are becoming more selective in their approach. Financing for late-stage and growth-stage start-ups slowed. The decline in funding this year is largely due to the slump in late-stage deals (series D and above), which has halved from $24.91 billion in 2021 to $11.7 billion in 2021.
The number of late-stage funding deals also fell to 122 from 177 in 2021, according to data. Most high-value deals occurred early in the year, and the top five funding rounds were completed in the first four months.
“Many startups haven’t raised[funding]this year because they all want to grow to their future valuations and be priced at a premium,” said Digital and Technology. Pankaj Naik, Co-Head of Investment Banking, said. , Avendus Capital told his ET.
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Meanwhile, early-stage funding deals (seed and series A rounds) grew at a slower pace. The amount VCs invested in seed and Series A rounds this year has increased to $5.40 billion, a 44% increase from $3.74 billion in 2021.
Last year, the growth rate of funding in these two rounds was over 165%.
Growth-stage funding rounds (Series B and Series C) remained broadly flat at $6.84 billion in 221 deals compared to $6.82 billion in 231 deals in 2021. In a recession, you only see people who have real confidence in their ideas and quit their day jobs to start their own businesses. So the quality of founders is much higher,” said Rahul Taneja, partner at Lightspeed Venture Partners.
The data also show that while top startup hubs such as Bangalore, Delhi NCR and Mumbai continue to lead in terms of funding, smaller centers such as Chennai, Hyderabad and Pune recorded growth in funding. also shows.
About a dozen founders and investors told ET that fundraising activity will be subdued in the first half of 2023, with new-age companies seeking funding channels only towards the second half.
Several growth and late-stage startups also didn’t seek funding because they had plenty of cash after making fancy rounds at the peak of fundraising activity in 2021.
In terms of most active investors, Sequoia Capital India topped the charts with 73 transactions per year. Some of its major bets were D2C brand Mamaearth, fintech firm One Card, and HR tech firm Darwinbox.
However, this is significantly less than the 110 checks we made last year. Accel India and Better Capital have signed 57 deals each in 2022.
New York-based Tiger Global, one of the most active investors last year, closed only 50 deals this year, according to the data platform.
In 2022, venture capitalists closed 48 funds totaling more than $7 billion. In contrast, in 2021, these investment firms closed 39 of his funds to raise his $3 billion.
The e-commerce and fintech sectors will dominate in 2022, raising $5.25 billion and $5.2 billion respectively. However, in line with broader trends, this was significantly lower than last year’s figure, when these two sectors raised $10.04 billion and $7.99 billion respectively.
Meanwhile, the enterprise segment recorded an increase in funding to $4.88 billion in 2022 compared to $3.72 billion last year.
Going forward, investors said the focus will be on the startup’s business fundamentals rather than the sector.
With the global public market rout, late-stage startups (once celebrated for their growth) have questioned key fundamentals such as profitability and costs.
“Sectors that will weather the storm. Well, it will be a function of the nature of the business. Sectors that are openly trying to rely on customer acquisition will face headwinds with very high customer acquisition costs. Companies with strong positive trends and established market size will feature this season.”
Top 5 deals of the year: $805 million raised by content aggregator platform Dailyhunt, $700 million raised by Swiggy in January, $665 million raised by Byju’s in March, Web3 platform Polygon $450 million raised by SaaS company Uniphore in February.
A round structured through convertible bonds helped as price discovery became more difficult and cash-hungry startups couldn’t raise at a premium to their previous valuations.
Mature startups, including those that put their IPO plans on hold amid weak public market sentiment, turned to convertible bonds as a funding tool.
These include startups such as B2B grocery company Udaan, edtech decacorn Byju’s, and health tech company Pharmeasy. raised capital through
“Convertible rounds are more complicated for late stage startups than early stage and come with all sorts of options. have agreed to convertible rounds: pricing risk is important and it can be more harmful to get the price wrong than to wait 12 months to get it priced. There is potential,” said Karan Mohla, partner at B Capital Group.
The outlook remains bleak for late-stage startups that have raised debt through dollar bonds and other complex means.
“Another type of convertible bond, which is a convertible bond denominated in dollars and with a decent yield, is a bit riskier. It requires a lot of security. It’s a dangerous proposition if things don’t go as planned, and if some of these companies don’t turn around, they could pile up debt,” said Naik of Avendus Capital.
However, convertible bonds quickly took precedence on startup capital tables due to their innate nature. These bonds will be converted into stock at a later date, but currently do not require a valuation attributed to the startup.
“Some early-stage companies are using convertible bonds as bridges to specific financial and business milestones, and it works well. It’s only when you demonstrate your ability,” said Tejeshwi Sharma, Managing Director of Sequoia Capital India.
Another aspect that will be important in writing future checks, according to investors, is whether the company will be accepted on the public market.
The number of consumer internet company initial public offerings (IPOs) in 2022 has decreased compared to 2021.
There were 11 new economy company IPOs in 2022, compared with 16 listings last year, according to data provided by research firm Tracxn. The average IPO market capitalization has also dropped to $517 million compared to his $4 billion in 2021 when Zomato, Nykaa, Paytm, Policybazaar and others hit the public market.
Consolidation momentum continued in 2021-2022 when it came to Indian start-up mergers and acquisitions (M&A), but companies took a more cautious approach.
There will be 234 M&A deals in 2022 compared to 221 in 2021, according to data from Venture Intelligence. However, only 72 of his deals have been announced this year, compared to 70 deals last year. His M&A deal value in 2022 was $3.01 billion, compared with $8.43 billion last year, according to the deal whose value was disclosed.
Investors expect acquisitions to be a broad theme next year, given the uncertainty of funding for some startups.
“Core market consolidation and adjacency expansion will be the theme next year. We may see mid-size M&A as large companies consolidate their respective markets,” said Sharma of Sequoia Capital India. says.