Startups brace for funding surge in 2024, says report

Scaled startups that raised large amounts in the boom period of 2020 and 2021 could come back to the market this year for new funding rounds, driving incremental growth for the venture capital investment activity in 2024 over 2023, according to a report by Bain & Company, and Indian Venture and Alternate Capital Association (IVCA).

Additionally, risk-capital investors – looking to widen the base of their investments – could turn to more traditional businesses during the year, it added.

During 2023, growth and late-stage startups chose to defer fundraising, and investors took their foot off the gas pedal owing to rising interest rates, leading to the number of mega rounds (those over $100 million) falling to only 15, compared to 48 in 2022.

In contrast, small and medium-sized deals (less than $50 million) witnessed milder compression, declining by about 45% from 1,501 to 852, the report said.

As per the India Venture Capital Report 2024, investments in India declined to $9.6 billion in 2023, compared to $25.7 billion in 2022.

“We’re seeing some greenshoots in investment activity but it’s yet to go back all the way…that will continue to be the dominant theme of 2024. We expect that investment activity will pick up in 2024 over 2023. We believe we have troughed it out…a lot of deals currently under diligence will come to fruition in H2. We’ve already seen two unicorns in 2024, and we expect some of that will start improving incrementally,” Sai Deo, partner, Bain & Company said.

Back to basics

Deo underscored that while tech-focused sectors still continue to rule the roost in terms of proportion they command of overall deals, investors are increasingly starting to look at traditional sectors.

“We expect to see more investments into traditional sectors in 2024. Historically, there have been several successful investments that VC firms have made. Over the last couple of years, while tech-focused investments have been fundamental…there is renewed recognition of the fact that there are good businesses in traditional sectors. For example, offline retail, credit focused banking, financial services and insurance (BFSI) companies could see increased interest from VCs,” she said.

ET reported on March 8, how tech-first venture capital firms such as Accel and Nexus Venture Partners are signing deals in the consumer and offline business segments.

In 2022-23, investors such as Elevation Capital, Accel and Peak XV Partners cut cheques for traditional businesses such as Sarvagram Fincare, Vridhi Home Finance, Brick&Bolt, Fibmold, Neo Asset Management and ApnaMart.

Green shoots

Among emerging sectors, generative artificial intelligence (AI) saw significant momentum, the report underlined, with generative AI apps attracting the lion’s share of funding. Funding for generative AI startups surged to $250 million in 2023 from $15 million in 2022.

Electric mobility also gained momentum with rising maturity of the ecosystem fuelling investor interest. “The ecosystem received over $600 million in funding in 2023 with original equipment manufacturers (OEMs) and mobility services attracting over 70% of the funding,” the report noted.

In 2023, exit activity by investors also remained buoyant with liquidity being provided to limited partners, or sponsors of funds, gaining priority in a high interest rate environment.

The Bain & Company report said that exits surged by almost 1.7 times to reach $6.6 billion in 2023. Crossover funds led the pack and comprised close to 65% of total exit value.

Further, non-IPO public market sales were the majority exit route, as crossover investors trimmed their positions in their publicly listed portfolio companies, it pointed out, adding that secondary and strategic sales also increased in value, primarily driven by mega-exits in consumer tech firms like Lenskart, and Tiger Global and Accel’s sale of Flipkart shares to Walmart.