Startups impacted by India’s venture capital downturn

Category: Asia Startup
Posted by Lea Hogg

India’s venture capital landscape has experienced a significant contraction, with funding flows sharply decreasing after a period of aggressive investment in private companies. This downturn has particularly affected the Indian start-up ecosystem, which is now facing a challenging environment for growth and sustainability.

Boom and bust of Indian venture capital

In recent years, India’s private markets enjoyed a surge in venture capital, with investors like SoftBank, Tiger Global, and Sequoia India (now Peak XV Partners) pouring money into young companies at high valuations. The edtech company Byju’s, for example, was valued at $22 billion in early 2022 but has since seen its valuation plummet to less than $1 billion.

The Indian stock market, however, tells a different story. The Nifty 50 index has seen substantial growth, with a 30 percent increase over the past year and a 90 percent rise over five years. Despite this, the private market is reeling from the aftereffects of the 2021 bubble, with venture capital inflows dropping more than 60 percent from $26 billion in 2022 to about $9.5 billion.

The decline in venture capital has led to a decrease in deal volume and average deal size, as well as a significant reduction in the number of new unicorns—start-ups valued at over $1 billion. In 2023, only two new unicorns emerged, compared to 44 in 2021 and 26 in 2022. Additionally, the Indian start-up ecosystem witnessed over 24,000 job layoffs in 2023, an increase from the previous year’s 20,000.

The high cost of capital in India has made the start-up ecosystem vulnerable, with the Reserve Bank of India increasing its benchmark interest rate from 4 percent in May 2022 to 6.5 percent in March 2023. This has made it difficult for start-ups to raise significant sums of money locally, leading some entrepreneurs to seek opportunities abroad, particularly in the United States.

Despite the challenges, the buoyant listed markets offer a glimmer of hope for companies that have weathered the venture capital crunch. These start-ups may find more favourable conditions for initial public offerings (IPOs), potentially opening a new chapter for growth and investment.

While India’s venture capital market faces a painful adjustment, the resilience of its start-ups and the potential for recovery in the public markets suggest that the ecosystem can navigate through these turbulent times. The key will be for entrepreneurs and investors to adapt to the new financial landscape and find innovative ways to thrive.