Indian startups struggle as funding crunch bites

A funding squeeze at Indian startups that has already led to layoffs and delayed stock listings is set to worsen, as investors reckon with stretched valuations and faltering consumption growth, likely laying the ground for industry consolidation.

Startups in India raised just $2 billion in the first quarter of 2023, 75% lower than the same period of last year, and the smallest quarterly number in nearly three years, figures from data firm CB Insights showed.

At this run rate, startups may end up raising less than $10 billion this year, a far cry from the record $30 billion garnered in 2021 and $20 billion in 2022.

The slowdown is a setback for startups as well as Prime Minister Narendra Modi who has lauded their success by calling such companies the “backbone of new India”. It could hurt India’s economic growth and its jobs market.

Global factors such as high rates and inflation have weighed on the investment climate in India and elsewhere – startup funding in the US dropped by around half to $32.5 billion in the first quarter, while in China it fell 60% to $5.6 billion.

But India’s startups - which are far more reliant on foreign capital than global peers - have seen a more severe squeeze.

“Indian startups are not catering to a billion consumers. All of them are selling to the same 100 million. The (consumer) market seems 2-3 times inflated,” said Ankit Nagori, a former top executive of Walmart’s e-commerce arm Flipkart who now runs cloud kitchen startup Curefoods.

Six investor sources and three startup founders told Reuters they expect the funding environment to worsen and many multi-billion-dollar firms to cut valuations within two years.

In recent weeks, BlackRock internally halved the valuation of Indian online education firm Byju’s it has invested in to $11.15 billion from $22 billion, while Invesco slashed food delivery firm Swiggy’s valuation by a quarter to $8 billion, disclosures from the US investors show.

And only 271 Indian startups raised funding in Q1 2023, compared with 561 last year, according to CB Insights.

Published in The Express Tribune, April 20^th, 2023.

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