In what looks like a long funding winter for Indian startups, sectoral funding hit a two-year low of $2.7 billion during Q3CY22, according to estimates by PwC. Companies had garnered as much as $11.4 billion in the year-ago period and about $6.6 billion in the preceding quarter.

“Barring edtech and e-commerce B2B, funding activity declined across all sectors during Q3CY22 (when compared to Q2CY22),” analysts say in the report. Despite a whopping $562 billion worth of dry powder earmarked for startups globally in VC funds, startups across the world are scrambling for capital. This is indicative of the fact that the flow of funds is getting increasingly selective and an expansive pitch deck or PowerPoint presentation alone will not be enough to get investors to back startups.

“We estimate global committed capital of more than $20 billion raised for India not yet deployed,” Rahul Chandra, Co-Founder and Managing Director at Arkam Ventures says in a recent report by PwC. Chandra expects this capital to trickle back to Indian start-ups only by the second half of 2023. The funding winter then indeed is not a brief one and analysts do not have any visibility as of now. “Funding winter continues in India’s start-up ecosystem as well as globally, and it’s uncertain when this will last,” says Amit Nawka, startup leader and partner, deals at PwC India.

For all the uncertainty and scepticism surrounding the growth potential and sustainability of the edtech sector, the bulk of the fund flow in the segment has been helped by 81% of upGrad’s $225 million fundraise during the quarter. In all, fintech, logistics & autotech, SaaS, media and entertainment, and edtech contributed about 67% of the total funding activity during Q3CY22. Not only funding value but the average deal size also declined sequentially—compared to $23 million in Q2 CY22, average deal size dropped to $13 million in Q3.

In the SaaS space, while six companies raised more than $100 million each in Q2CY22, only CleverTap raised over $100 million in Q3 CY22. “More than 75% of the deals (in terms of deal count) in this space were driven by early-stage funding rounds, with a low ticket size of $4 million each in Q3CY22,” say analysts at PwC. “Of course, as global markets correct after a series of macro and geopolitical events over H1 2022, Indian start-ups have needed to prepare for a new season of selectivity from investors. We anticipate more capital to be available from January 2023. However, it is almost certain that selectivity in deal-making will increase, and startups will have to prove a path to sustainable growth. IPOs will also resume from 2023, and pricing is expected to be far more moderate as well,” notes Pranav Pai, Founding Partner and CIO at 3one4 Capital.

The D2C boom also seems to have been capped to a certain extent. Funding during the July-September quarter in terms of deal value in the space dipped by about 36% against Q2CY22. “Out of the total funding worth $226 million raised, approximately 73% was driven by Lenskart, which raised $166 million,” analysts point out. Only two startups—Shiprocket and OneCard achieved unicorn status during the quarter compared to four in the preceding quarter and 14 in Q1CY22.

The global picture is equally bleak. A mere 20 unicorns were added globally in Q3CY22, compared to as many as 136 in the year-ago quarter. The US led the unicorn count having contributed 55% of the new unicorns during Q3CY22. Besides India, the UK and South Korea added two unicorns each. “There is around $562 billion in dry powder available for start-ups in VC funds, an indicator that we could see strong investment cycles ahead. The buildup of dry powder is due to a market pullback by VC funds that are being picky about their investments. The focus is on companies that have strong unit economics and a path to profitability,” say analysts at PwC.

Market intelligence platform Tracxn states that local startups raised $3 billion in Q3CY22, 57% lower funding as compared to the previous quarter. The average ticket size also witnessed a drop across all funding stages, with the late stage seeing the biggest fall of over 70%, from $142 million in Q3 of 2021 to $42 million in Q3 of 2022, indicating that investors are not willing to make large investments until economic conditions stabilise.

“Our quarterly startup report confirms that India is currently experiencing a funding slowdown which is expected to continue for the next 12-18 months and the effects of the funding slowdown are expected to intensify going forward. Executives across the world anticipate a recession in the near future and are making preparations to cut costs. To add to their woes, the recent energy crisis in the UK and Europe and also the sliding GBP and EUR have increased the likelihood of a global recession,” says Traxcn co-founder Neha Singh.

Funding winter in Indian startups

Long winter: Startup funding at 2-year low in July-Sept quarter