Is funding winter nearing its end? Experts predict resurgence for Indian startups

After a prolonged funding winter, Indian startups are expected to witness a resurgence in funding inflows this year. Rajan Anandan, Managing Partner of Venture Capital firm Peak XV Partners (formerly Sequoia Capital India & SEA), hinted at a reversal of the drought. “Indian startups are expected to raise around USD 8 million to USD 12 billion in funding this year,” he said, according to a Business Standard report.

In the last two years, almost all businesses have worked on unit economics and have become attractive for investors to explore. While money was never an issue, as funds were sitting on a lot of dry powder, the numbers were not looking good, so funding took the slow lane. But with improved numbers, the investors have again become active, and it seems the year will be good now, as per Anil Joshi, Managing Partner, Unicorn India Ventures.

The Funding Landscape

Funding in 2024 stood at USD 723 million in January and USD 890 million in February. There is also a significant uptick of funding so far in March, which shows the funding momentum is higher than in 2023 (monthly average of $700 million). Indian startups are on track to raise $10-$12 billion this year, said Premchand Chandrasekharan, Partner at Avalon Consulting, while providing insights into the funding momentum.

A Promising Start

If the trends of the initial couple of months of 2024 were to hold over the entire year, then early-stage funding value could be significantly higher than the $2.3 billion observed in 2023. Chandrasekharan added, “If the renewed interest in early-stage funding holds, the total number of deal transactions is likely to be higher in 2024. This could mean increased interest from a wider portfolio of relatively moderate appetite investors.”

Cautious Optimism

While optimistic, industry experts advised caution and predicted a muted environment compared to the pre-pandemic years. Rajul Garg, Founder and Managing Partner at Leo Capital, stated, “After the excesses of 2021 and 2022, it was inevitable that we had a funding winter. We are beginning to see more investments in 2024, but we believe it will still be a muted environment through 2024, perhaps comparable to pre-Covid years of 2018 and 2019.”

Sectoral Focus

Two sectors are strong contenders: B2C eCommerce and SaaS. With 692 million connected Indians, their fingers flying across their smartphones, and 80 per cent of them preferring to shop online, eCommerce’s consistent growth continues to attract investors, opined Tanmay Kumar, Group CFO, Shiprocket.

AI and Data Analytics in the Spotlight

Saloni Jain, Founding Partner at Sunicon Ventures, highlighted the potential of the AI and data analytics sector. “In 2024, the sector poised to receive the highest funding inflow in India will be Artificial Intelligence (AI) and Data Analytics. This projection stems from the increasing importance of data-driven decision-making across industries and the transformative potential of AI technologies.”

Fintech and InsurTech on the Radar

Manmohan Tiwanan, MD and CEO of Wodehouse Capital Advisors, shared insights on the fintech and InsurTech sectors. “The fintech sector might have to wait a bit longer until regulations become clearer on some of the global themes that are yet to play out in India, e.g., Crypto, P2P Lending, BNPL, etc. Some other segments like InsurTech might see a renewed interest with growing penetration and product innovation.”

Additionally, semiconductors, spacetech, defence, energy and climate will definitely benefit from the government and corporate tailwinds. Fintech continues to attract attention as the regulatory framework settles further, said Narendra Bhandari, General Partner, Seafund.

Sectors that will see Muted Investments

Jain added, “In contrast to the anticipated surge in funding for AI and data analytics, we predict a subdued outlook for Direct-to-Consumer (D2C) brands in terms of funding in India. This projection reflects a shift in investor priorities and market dynamics.”

Additionally, according to Vikram Chachra, Founding Partner of 8i Ventures, Edtech is expected to see muted funding sessions in 2024.

Investors will be extremely cautious before funding startups with high burn rates. They will assess aspects like the plan towards profitability, the core management team, and the corporate governance of the business and gauge the risks that the start-up could face. Rather than the sector, investors will look at the company’s medium to long-term aspirations and possibilities for a potential IPO/ exit route, as per Abhiroop Medhekar, Founder and CEO of Velocity.

However, the funding winter is here to remain for unprofitable businesses and unsustainable business models. In the past, there have been cycles of winter and summer depending on sentiments. This winter has taught us that companies need sustainable businesses along with capital efficiency, as per Nitin Jain, Chair, New Age Businesses Committee, PHD Chamber of Commerce and Industry (PHDCCI).