Startups find difficult to raise funds, investors step back

NEW DELHI: The economic turbulence of 2022 has entered 2023, even getting worse, and startup founders are finding it all the more difficult to raise funds amid the global macro-economic conditions.

Amid a deepening funding winter, only 53 per cent of startup founders had a positive fundraising experience (71 per cent of those who attempted to raise) in 2022, down from 92 per cent in 2021.

Startup founders expect this year to be challenging, with 58 per cent of founders expecting a tough fundraising environment, according to a recent report by InnoVen Capital, Asia's leading venture debt firm.

"The year 2022 was challenging for the startup ecosystem with an end to cheap money, rising interest rates and a challenging geopolitical environment. The positive aspect of the slowdown has been an increased appreciation for building sustainable business models," said Ashish Sharma, Managing Partner, InnoVen Capital India.

Fintech startups in India raised $5.65 billion in 390 rounds last year, a massive drop of 47 per cent in terms of funding amount and 29 per cent in the number of rounds when compared to 2021.

This drop in funding can be attributed to the decline in late-stage funding from $8.3 billion in 2021 to $3.7 billion in 2022, a drop of 56 per cent, according to data provided by global software-as-a-service (SaaS)-based market intelligence platform, Tracxn.

Fintech startups recorded 13 funding rounds of $100 million+ in value in 2022, which is a massive drop of 50 per cent, from 26 rounds in 2021.

Only four startups in India's fintech sector received unicorn status in 2022, far lower compared to 13 new Unicorns in 2021.

"The country is currently experiencing a funding winter. Growing inflation and macroeconomic tensions have made the investors step back from making big investment decisions," the Tracxn report said.

In 2023, the tightening funding environment has also led to an increased focus on profitability and unit economics.

"While both growth and profitability are important, for the first time in seven years, founders had a higher bias for profitability over growth. Around 55 per cent of founders cited profitability as a bigger focus area in 2023, compared to only 17 per cent in 2021," the InnoVen Capital report said.

Startup founders are also increasingly looking towards a domestic IPO as the likely mode of exit, despite the recent volatility of public market tech companies.

As Indian startups face turbulence in the global funding winter, experts said they need to reserve cash, create a long-term goal and adopt a culture of customer feedback to survive in 2023.

According to Ritesh Malik, Director, Alliance for Digital India Foundation (ADIF), startups must hear back from their customers.

"The more you hear from your customers, the more you will be able to understand their changing needs. And the more your product becomes dynamic, you constantly change that product to the whims and fancies of the customer," he told IANS.

Ravish Naresh, CEO and Co-founder of Khatabook, said that there is a stronger acknowledgment of Indian startups' role in solving core problems of emerging economies to bridge the socio-economic gaps.

"This year, our primary aim is to turn profitable and scale up the digital lending offerings to meet the unmet credit demand of Indian MSME businesses. We are optimistic about the Indian economy and its opportunities for the startup ecosystem," he said.