It Is Not Just About Funding Winter

’FUNDING WINTER’ for start-ups has been the buzz for past 18-24 months. A recent report by data platform Tracxn throws up interesting numbers. In first 11 months of 2023 (until December 5), start-ups in India received $7 billion in funding, lowest in five years and down 72% from record $25 billion in 2022. More important, late stage funding saw the biggest drop of 73% from $15.6 billion to $4.2 billion. Early-stage funding dipped 70% to $2.2 billion from $7.3 billion in same period of 2022. There were just 17 big-ticket rounds of $100 million-plus compared with 55 last year. Some of the late stage start-ups that got more than $500 million were IPO-bound PhonePe and D2C eyewear company Lenskart. OlaElectric , Zetwerk, InsuranceDekho and KreditBee got sub-$200 million.

So, is it just about availability of funds or are there other factors that work? Shashank Randev, founder, 100X, which invests in early stage start-ups, says his firm issued 62 cheques of ₹1.25 crore-plus at seed stage in 2023. He says while there is no dearth of capital, VCs are becoming more selective about investing in late-stage companies. “Investors are raising funds to deploy in, say, only five companies as opposed to 15 one year ago, and looking at outliers that are scalable and becoming profitable,” he says. As some start-ups are lined up for IPO in 2024, in late stage, “we still don't have enough companies where investors want to put money immediately.”

The fear of missing out (FOMO) seems to be no longer at play. One reason, perhaps, is the extent of governance problems at big Indian start-ups which has made investors cautious. A classic example is Byjus, which counts Sequoia India, now Peak XV, Blackstone, SilverLake and Sofina among investors and is embroiled in litigation in U.S. and governance and audit problems — a huge downfall for a company that was once valued over $20 billion. A partner at a leading VC firm says there was a time when Byjus founders would give investors a ‘take it or leave it’ offer. Now, it is valued at just under $3 billion, as per its investor Prosus, which did not disclose the exact figure in latest earnings call. It had valued the company around $5 billion in June 2023. Even the IPO of Aakash, which Byjus had acquired, looks uncertain. Another blowout happened in BharatPe with mud-slinging , legal battles and management overhaul. Others like Zilingo, GoMechanic, Trell are also having their share of investor-founder disconnect.

Perhaps investors are also cleaning up their act. For instance, Peak XV has taken proactive steps, including seeking more disclosures from founders and focusing on better internal audit among other things, according to reports.