Winter’s Tale Rewrite, Startups Inject a $1.5 Billion Twist, Anticipating Secondary Rounds to Lead 2024 Deal Flow

Startups have injected a $1. 5-billion twist into the narrative of winter’s challenges, even as a funding squeeze impacted Indian startups in 2023, and December has emerged as the most active month for risk capital investors in 2023 , with over $1. 5 billion in funding announcements recorded until Tuesday.

However, many industry observers exercise caution in declaring an end to the funding winter. The funding volume for this month now surpasses January’s $1. 4-billion record, marking the highest for the year as of December 26, according to data compiled by Tracxn.

Despite this end-of-year surge, the overall funding for I ndian startups in 2023 stands at a seven-year low of $8. 8 billion . It is noteworthy that the monthly funding total had not exceeded the billion-dollar threshold since March of the same year.

Late-stage Deals in March amounted to $1. 1 billion in announced deals. Investors clarify that the latest data relate to deals concluded a few months ago, with the formal announcement experiencing a lag.

Defying Gravity As per the data, December witnessed an influx of over 85% of fund flows into late-stage deals, defying the prevailing trend of a slowdown in growth- and late-stage funding. The surge is primarily attributed to a handful of substantial transactions, with one notable example being the $600-million fund injection into the e-commerce marketplace Flipkart by the US-based retail giant Walmart. This investment is part of Flipkart’s ongoing $1-billion funding round, which is yet to be finalized.

Additional high-value transactions disclosed in the same month include the $340-million fundraising by the business-to-business e-commerce platform Udaan , spearheaded by the UK savings and investment firm M&G Prudential. Notably, a significant portion of Udaan’s deal involved the conversion of existing debt into equity, with the fresh capital from M&G Prudential constituting a relatively smaller share. The month also saw warehouse automation startup GreyOrange concluding a $135-million funding round led by Anthelion Capital, marking the closure of deals exceeding $100 million in size.

December’s commitment surpassed the previous month, reaching nearly double November’s approximately $800 million and marking a 15% increase compared to the $1. 3 billion recorded in December 2022. The data encompass primary and secondary deals, including funds raised through debt and convertible instruments.

Closure timelines have notably extended compared to the past decade, with some announcements and closures occurring after months of meticulous work, according to Karthik Reddy, the co-founder and partner at Blume Ventures, an early-stage venture capital firm. The booming IPO market has accelerated tech IPOs, providing more comparables around true valuations and intensifying secondary flows. The year saw a shift in deal closure timelines, with extensive investor due diligence and corporate governance cases affecting the pace.

Discussing the potential for sustained funding recovery, Reddy stressed that secondary flows and impetus automatically boost growth-stage funding. In December, late-stage deals dominated commitment sizes, while early-stage investors led in terms of the number of deals announced. We Founder Circle, Lightspeed Venture Partners, and 3one4 Capital were among the most active investors, with a focus on various funding ranges.

Consumer brands, including Nat Habit, Biryani By Kilo, Farmley, Snitch, and The Sleep Company, secured funds from notable investors amid a trend of increasing venture money for consumer brands. Despite larger tech companies experiencing a slowdown in growth metrics and high valuations, consumer brands have seen notable interest. Looking ahead, there’s an expectation that enterprise and fintech sectors will continue attracting the bulk of financing, with increased interest in emerging sectors such as generative AI, deeptech, and cleantech.

Secondary Rounds to Lead 2024 Deal Flow Secondary share sales gained prominence in 2023, providing an alternative avenue for late-stage ventures amid a funding crunch. Investors anticipate this trend to persist in 2024, focusing on a limited number of valuable assets where existing investors seek to partially sell their stake. Secondary deals have played a significant role in late-stage funding, offering investors a way to exit, even at a valuation discount, a trend less common in India but familiar in the cycles of the US and Europe.

Many say that this trend is expected to persist into 2024, presenting early investors with the dilemma of either exercising patience for valuations to recover or opting for an immediate exit. “Investors are averse to downrounds, and in 2021, company valuations were skewed. There’s only a limited duration they can wait before exploring the market,” remarked Alok Goyal, a partner at Stellaris Venture Partners.

“Secondaries are likely to continue as a prevailing theme. ” Notably, among the substantial deals falling into this category was Lenskart’s $450 million funding, raised through secondary share sales from ChrysCapital and Abu Dhabi Investment Authority. These secondary components in deals provided early investors with partial exits and enabled family offices to secure substantial stakes.

It’s crucial to note that funds from secondary sales do not contribute to the company’s finances. In 2023, startups also turned to internal bridge rounds from existing investors to extend their runway and avert downrounds with new investors amid a stall in revenue growth. Similar to 2022, the domestic technology ecosystem continued raising capital through convertible notes, or short-term debt, in exchange for equity at a later stage to resist down rounds.

In a broader context, overall funding witnessed a nearly 70% decline in 2023, attributed to global macroeconomic challenges, conflicts, and inflationary pressures. Investors and operators anticipate the stress on investments to persist well into 2024. Data from Venture Intelligence reveals that, as of December 15, new-age Indian companies garnered only $7.

5 billion in capital across all stages, a sharp contrast to the $24. 3 billion in the previous year, indicative of investor caution. Dev Khare, partner at Lightspeed Partners India, remarked, “There is still some hangover remaining in the ecosystem from the excess liquidity era which lasted till March 2022.

” He added that investors are cautiously optimistic, drawing parallels with the market’s state between 2016 and 2017, which witnessed consolidations in 2016 and an upward trajectory starting in 2017. Shutting Shop The year also witnessed shutdowns across various stages, including those of Frontrow, ZestMoney, and Akudo . Anand Lunia, partner at India Quotient, emphasized that resilient founders and promising companies will secure funding, even if the terms are not in line with their expectations.

He anticipates a reset in venture capital fund sizes and round sizes, particularly as the market dynamics shift. Additionally, as funding declined, some venture companies deferred the final closure of their funds . Rohit Bhayana, co-founder of Oister Global, highlighted that global macro factors have posed challenges for Indian funds in raising capital.

Several fund managers have adjusted their capital raise cycles with rising bond yields and interest rates; the rise of domestic capital is expected to contribute to bridging part of this gap. The Viewpoint The nuanced dynamics of 2023 present a complex tableau for both investors and startups alike. The surge in late-stage deals, underscored by the strategic choices of major players like Flipkart and Lenskart, hints at a reconfiguration of funding strategies amidst challenging times.

The emphasis on secondary share sales and internal bridge rounds showcases the industry’s ability to pivot and seek alternative paths to ensure survival. Looking ahead, the cautious optimism tempered with a dose of realism seems to define the sentiment, with stakeholders bracing for continued challenges and recalibrations in the funding sector. The coming year is poised to be a testing ground for the adaptability and resilience of India’s startup ecosystem in the face of evolving global and local economic conditions.

The Last Bit, As the curtain falls on 2023, the paradox within India’s startup ecosystem remains palpable. December’s funding surge, while a welcome respite, does not overshadow the broader challenges that persisted throughout the year, resulting in an overall funding decline of nearly 70%. The year saw startups grappling with extended closure timelines, internal bridge rounds, and a reliance on secondary share sales to weather the storm.

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