What was supposed to be another record year of funding for startups attracting millions of dollars in capital ended up being a tepid one. Startup funding dipped to $24.7 billion in the January-November period of 2022, registering a year-on-year (YoY) decline of about 35%. The sector had garnered investments worth $37.2 billion in the previous year, a report compiled by market research firm Tracxn shows. High inflation and hikes in interest rates by central banks globally have stoked fears of a recession, nudging investors to assume a cautious posture and steer clear of risky bets like startup investments. Driven by a lull in late-stage funding, the total number of funding rounds also saw a significant drop of about 30%; the count of investment rounds decreased to 1,841 so far this year from 2,647 rounds seen in the January- November period last year. Late-stage funding, which means investor capital attracted by established startups, dipped 45% YoY to $16.1 billion during this period. Local late-stage startups are largely dependent on external funding for growth. “India started experiencing funding winter in Q4 of 2021 and it has been on a declining trend since. Because of rising interest rates and fear of a worldwide recession, investments across all industries have been impacted,” analysts said in the report. 

That the funding scenario is not very optimistic can be deciphered from the fact that even the top performing segments (in terms of funding in 2022) retail and fintech have seen a 57% and 41% YoY decline in funding, respectively, so far in 2022. Edtech that had cornered most of the startup funding through 2020 and 2021 has also seen a dip in fund flow as students got back to classrooms with the improvement in Covid situation and spent less time on edtech platforms. “Edtech is another sector that has seen a drop of 39% (in funding YTD) as compared to the same period last year. In the case of edtech, we have seen a decline in demand since schools and colleges started reopening after the pandemic, forcing many edtech players to lay off their workforces to reduce operational costs,” analysts said in the report. “2023 will be worse than 2022 for tech. This is what I keep hearing,” tweeted Gaurav Munjal, founder at the Unacademy Group which is one among many edtech startups to have cut staff strength in the recent economic downturn. 

Big startups like Zomato and Oyo have recently resorted to layoffs as tech companies get conservative in terms of expenses and gear up to navigate a period of uncertainty.

Even seed and early stage startups, considered to be fairly shielded in terms of funding because of the smaller scale of their businesses, have been struggling to get capital. The number of seed-stage rounds has dropped by 38% as compared to the previous year. “It is just a trickle down effect of overall activity which has happened,” Neha Singh, co-founder & CEO at Tracxn told Fortune India. Besides, India added only 22 unicorn companies so far this year, as compared to 46 being added last year. 

Singh expects the overall startup funding activity to be muted in the next two to three quarters. “People are writing fewer cheques, valuations are more depressed,” says Singh. Singh, however, argues that India is in a better economic shape and the startup ecosystem will bounce back faster compared to its peers. “Investors in India are more optimistic as compared to counterpart which is reflected in the public markets. On a YTD (year to date) basis, the public markets here are still in the green compared to Nasdaq which is still in the red. In the beginning of this year, some of the term sheets had been withdrawn and some of them were getting renegotiated in terms of valuations. Right now, the situation is still comparatively better,” says Singh. 

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