Funding into Karnataka-based tech startups plummets by 72%. Here’s what investors are looking for

Funding in Karnataka's tech startups sharply fell 72% to $3.4 billion in 2023 despite the state being at the first spot in India in terms of overall funding to date and home to 39% of the unicorn companies in the country, according to a report published by Tracxn, a data intelligence platform.

The Tracxn Geo Annual report stated that Karnataka's tech startup ecosystem received a total funding of $3.4 billion in 2023, which is a 72% plunge from the $12.2 billion raised in 2021, and an 83% decline from the $20.4 billion raised in 2021.

In this space, companies attracted late-stage investments worth $2.3 billion in 2023, a 74% decline compared with $8.9 billion in 2022, while the early-stage funding stood at $784 million in 2023, a drop of 71% from the $2.7 billion raised during the previous year, followed by 54% drop in seed-stage funding to $294 million from the $643 million raised in 2022.

Only two startups including PhonePe and Udaan secured the highest funding in 2023, raising $623 million and $377 million in Series D and Series E funding rounds respectively.

It is pertinent to note that no new unicorns emerged from Karnataka's tech startup ecosystem in 2023, contrasting seven Unicorns in 2022 and 18 in 2021. Also, no new companies from this space went public in 2023, as against two IPOs in 2022, the Tracxn report revealed.

There were three top-funded segments including fintech, retail, and enterprise applications in 2023. Karnataka's fintech sector secured a total funding of $1.15 billion in 2023, a decline of 51% compared with the $2.4 billion raised during the previous year.

The Retail sector witnessed total funding of $956 million in 2023, a decline of 56% compared with the $2.16 billion raised in 2022, the report said, adding that the Enterprise Applications sector attracted investments worth $928 million in 2023, a plummet of 68% from the $2.89 billion raised in 2022.

Bengaluru took the lead in terms of city-wise funding in 2023. Startups based in Bangalore raised $3.4 billion in 2023, while those based in Hubli raised $121,000.

Karnataka was the first state to introduce a dedicated Startup Policy in 2015. According to the Economic Survey of Karnataka (2022-2023), the state has a per-capita income of ₹3.01 lakh, the highest in India.

Since the inception of the Elevate Scheme, the state government has provided approximately ₹200 crore in funding to support 874 startups. In addition, the government also announced a series of incentives for startups in the state, including the establishment of an incubation center called ‘Innoverse’ with an allocation of ₹50 crore.

The decline in tech startup funding can be attributed to the prevailing macroeconomic conditions and geopolitical issues.

However, GrowthCap Venture founder Pratekk Agarwaal said that factors such as political instability, regulatory directives, and shifting investor preferences towards seasoned founders navigating regulated landscapes contribute to this trend.

“As investors recalibrate their strategies, emphasis shifts towards ventures with established leadership and regulatory foresight. This evolving dynamic underscores the need for startups to align with investor expectations while navigating regulatory frameworks, emphasizing resilience and adaptability in an ever-changing funding ecosystem,” Agarwaal told LiveMint.

At Artha Venture Fund, this climate has reinforced our focus on sustainable business models, emphasizing unit economics and revenue growth over inflated valuations, said Managing Director Anirudh A Damani.

He said the narrative is changing as venture capitalists and founders alike are now prioritizing robust, scalable businesses with clear paths to profitability.

“As we approach the end of this calendar year, post-election, a renewed vibrancy is anticipated. The VC community's message is clear: build resilient businesses focused on long-term value creation.”