Startup funding: Dry powder is limited

Nobody predicted that India’s startup street — a showpiece achievement of the last decade — would wear a deserted look so soon, and nobody knows how long the winter would last. Facing an acute fund crunch and in survival mode, many startups have wound up their fancy offices from the expensive commercial skyscrapers and co-working spaces. Many of them are poring over their bills minutely, as they have realised that funding is not going to be as easy as earlier. In the last few weeks I interviewed top investors like Kalaari Capital, QED and Catamaran and many others who have Unicorn startups in their portfolio. All of them have turned very cautious now. Nobody has closed the money tap but the fund flow is not as forceful as it was. In fact, it is a trickle. Let me explain...

Traditional Indian businesses and startups

Tata, Birla, Ambani, Jindal, Singhania, Wadia…etc, etc. For decades, Indian business stories started with these few names and mostly ended there. The emergence of IT companies added a new dimension to India’s business as they built and scaled up the services segment. Pharma companies too contributed their mite but startups gave a new identity to Indian businesses. Even 10 years ago, grocery delivery in 10 minutes could not have been imagined as a business line by anyone. There are scores of new businesses that have emerged in just the last 10 years. According to government data, currently, there are over 90,000 startups. It is said that there were less than 1,000 startups in 2003. The total number of Unicorn startups is 108 with a total valuation of $340 billion.

From Boat delivering new-age headsets to Licious delivering meat, from Zepto bringing in tiny items like milk and curd, to Porter dispatching goods and products. From ride hailing cabs to food delivery to tailor-made clothes to make-up kits… startups are ubiquitous... These new businesses also gave birth to new investors. Earlier, a budding businessman would have to make dozens of rounds at banks for a few months to obtain capital for his business proposal, that too against hefty collateral. Sets of his colour printed business proposals would lie idle in the piles of documents at banks. Things changed when young boys wearing round-neck t-shirts, jeans and sports shoes began scrolling their business proposals on Mac laptops. Many of them were from IIT, IIM or IT backgrounds. As they started developing their products, more angel investors, venture capitalists, limited partners and private equity investors took interest. Today every mid-sized company or promoter has a family office to invest in startups and hundreds of active funds. But they have tightened their purse string perhaps too soon.

Funding has slowed considerably

In the first half of 2023, startups raised $3.8 billion through 298 deals. During the same time, in the first half of last year in 2022, a total of 729 deals were struck and $18.3 billion were raised. Before that, in the first of H1 of 2021, a total of 484 deals took place with $13 billion raised, according to PwC’s startup deal tracker.

Investors are unrelenting

Investors have set the bar high and are looking at investing in only and only quality startups. Initially, all experts and startups thought that funding winter may not last long. But geopolitical tensions, hike in inflation and interest rates and volatile markets have dragged it for too long. The bigger challenge is that raising funds has become difficult for investors as well. More than 70% of funding comes from outside India and the global economic environment is not very encouraging currently. For a startup, the biggest challenge now is raising funds at a lower value than the previous funding.

Startups support

The majority of the banks and large financial institutions have initiated processes to boost startups. From helping them open an instant bank account to offering cloud credit, there are lucrative incentives. On the other hand, the government has also launched initiatives like Digital India and Startup India. Nodal agencies like SIDBI have committed Rs 8,204 crore to 103 AIFs and Rs 14, 828 crore have been injected to boost 818 startups. The Startup India Seed Fund Scheme (SISFS) created by the Department for Promotion of Industry and Internal Trade (DPIIT) has initiated Rs 945 crore funding for startups.

Future of startups

The challenge is also that not many startups have proved themselves yet. Despite raising billions of dollars they are not even EBIDTA positive. To make matters worse, the market is getting fiercely competitive for a stagnant pie. Those who are listed are trading lower and their market value has been eroded significantly.

Startups also need to see what's next for them. What kinds of value are they going to create? Whether listing is on the cards? The challenge is business models are temporary these days and investors are looking at only scalable models. So, while the Indian startups are promising, we are in a too-soon, too-early situation. Those who come out of the tunnel will find the way.

(Editor's Note is a column written by Amol Dethe, Editor, ET CFO. Click here to read more of his articles exploring several buzzing topics.)