Shifting Tides: Quality Over Quantity
Data from Tracxn, a market intelligence platform, reveals that funding in the Indian startup ecosystem has remained relatively flat at $3.9 billion for the first five months of 2024. However, this figure masks a crucial change – a significant decline in the number of deals compared to the previous year. There were 465 deals in 2024 compared to a staggering 758 deals reported during the same period in 2023.
The managing partner of the micro-VC fund Artha Venture Fund, Anirudh A. Damani, describes this change as a calculated action by investors. He draws attention to the increasing emphasis placed on startups that have the potential to generate substantial returns on capital employed (ROCE) that outpace projected ROIs. Capital is shifting from startups that depend on steady inflows of cash to those that have strong customer acquisition, retention, and upselling capabilities as a result of this emphasis on value generation.
The Rise of the “Winners”: Bigger Cheques for Proven Performers
The average deal size has increased significantly, despite a reduction in overall deal activity. According to Tracxn data, there has been a 40% rise in average deal value from $6.1 million in the equivalent time of 2023 to $10.1 million in 2024. The aforementioned trend implies that investors are focusing their capital on well-established firms that have demonstrated success in the past.
The founding partner of fintech-focused venture capital company 8i Ventures, Vikram Chachra, attests to this investor predilection for “winners.” He notes that larger capital rounds, usually between $35 million and $50 million, are being drawn to category leaders with proven size and profitability. These prosperous businesses have proven to be capital-efficient, using disciplined operations to achieve profitability and shareholder value.
Damani goes on to highlight the reasoning behind investor support for these “winners.” He clarifies that because these companies have a track record of expansion and success, investors feel more at ease investing larger sums of money in them. This assurance helps businesses acquire holdings ahead of rivals and guarantees that high-performing businesses get the capital they need to keep growing.
The Scars of the Funding Winter: A Look Back
The funding environment of 2023 is very different from what it is now. With only $7 billion invested overall, 2023 was the least funded year for Indian startups in the previous five years, according to Tracxn. By comparison, this amount is a startling 72% decrease from the $25 billion invested in 2022. The impact of the financing winter was most noticeable in the late-stage funding market, where investments fell by 73% over the course of the year.
Signs of a Thaw? A Glimpse into the Future
The first half of 2024 saw a notable increase in the average deal size, which points to a possible late-stage funding rebound. From $2 billion spread over 53 deals to $2.1 billion spread over just 39 deals, investments in this category have increased dramatically. Investor sentiment is cautiously optimistic, indicating that the funding ice may be beginning to melt. With checks getting bigger, it is expected that financing at all phases would pick back up in the second half of 2024.
Sukhmani Bedi, partner at Orios Venture Partners, an early-stage investment firm, expects a significant improvement in deal activity for the remaining months of 2024. She highlights an observed rise in the number of high-quality startups across various sectors, coupled with ample “dry powder” (uncommitted capital) available for investment in promising ventures.
The upcoming Lok Sabha elections in India are also seen as a factor influencing the funding environment. With results expected on June 4, 2024, investors anticipate gaining the clarity needed to make long-term strategic investment decisions. Damani predicts a robust second half, with the revival of the SME (small and medium enterprise) and IPO (initial public offering) markets contributing to a renewed investor confidence.
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