Funding winter for startups: H1'22 investments for unicorns dip 16% y-o-y

The funding winter has gripped startups hard—data sourced from market research firm Venture Intelligence shows that investments into the unicorn startups dipped by 16% year-on-year to $8.5 billion in the January-June period. The number of new unicorns also saw a decline in tandem. The local startup sector birthed only four new unicorns in the second quarter of 2022 compared to about 11 unicorns in the year-ago period and 14 in the previous quarter. SaaS firm LeadSquared, beauty player Purplle, edtech startup PhysicsWallah and neobank Open joined the billion dollar valuation club in Q2.

A protracted Russia-Ukraine war has disrupted global supply chains, resulting in shortage of commodities and consequent price rise. With inflation rearing its ugly head, global central banks have raised interest rates, shoring up the cost of capital. Indian startups being heavily reliant on external funding are bearing the brunt. A spate of startups including unicorns like Unacademy, Byju's, Vedantu and Cars24 have laid off employees. Reportedly, more than 12,000 Indian startup employees have lost jobs. The global tally of impacted staff in the tech and startup sector stands at more than 22,000. That the situation is dire is reflected in the fact that even established global firms like Netflix which of late has been struggling to shore up its subscriber base and Tesla resorted to job cuts.

The availability of easy capital and the rise in digital adoption had triggered a massive influx of investor funding into Indian startups over the last couple of years with companies often raising funds at what analysts describe as "unrealistic" valuations. Buoyed by the boom, startups almost went on a hiring spree of sorts, strengthening tech and product teams as they eyed market launch of more solutions and products to cash in on the broader growth of the ecosystem. Analysts say that tech engineers switching jobs were being offered as much as two to three times jump in salaries. Not surprisingly, as funding took a hit, layoffs became rampant in the sector. In an email to employees earlier this year, Unacademy co-founder and CEO Gaurav Munjal had mentioned that the funding winter could last for as many as 12-18 months and that the firm will deploy cost cutting measures to sail through the crisis.

"Personally, I feel that we have seen somewhat of a bubble over the last few years especially in startup investing. There is an arbitrage at play where public markets are actually significantly cheaper than private markets today," Nikhil Kamath, co-founder at Zerodha and True Beacon, told Fortune India in a recent interview. "I think the startup funding ecosystem is going to be really difficult, at least for the next couple of years," Kamath had said. Several startups are stalling or going slow on their expansion plans, say analysts.

The overall PE-VC investments (across industries) also registered a decline. The total PE-VC funding touched $11.3 billion during the April-June quarter, a 25% year-on-year decrease, the data showed.

The only silver lining for startups is perhaps the $805 million funding garnered by VerSe Innovation, the parent of DailyHunt and short-video app Josh. The investment alone accounted for about 7% of the total share of PE-VC capital received in Q2.