VC Insights | Issue# 8 [December 16, 2024]
Shift in Funding Activity?
Investment activity in the Indian startup ecosystem has been undergoing an interesting shift in 2024. VCs and other investors have shifted their focus to growth- and late-stage bets, moving away from the early-stage investments that were favored before the funding winter of the past couple of years. Recently, YourStory published an article covering the same. Let us explore the insights into this significant shift in the outlook of investors in India’s startup ecosystem.
The Numbers
Early-stage investments largely refer to pre-seed, seed, angel, and Series A investments. Funding activity is characterized by the total number of deals and funding amount. Early-stage funding has been on the decline in 2024, while it almost halved from its peak in 2021-22. What is interesting is that unlike what has generally been the trend over the past 3-5 years, growth- and late-stage funding in matured, later-stage startups have seen a rise.
The data paints a clear picture. Early-stage funding fell to $3 Bn across 1,533 deals by November 2024, compared to $4 Bn over 2,137 deals during the same period in 2023. This decline contributed to a drop in total startup investments from $16.5 Bn in 2023 to $15.9 Bn in 2024. Meanwhile, growth- and late-stage funding increased to $13 Bn in 2024, up from $12.4 Bn in the previous year. Zepto’s $1.35 Bn fundraise in six months and Rapido’s $200 Mn Series E round highlights the growing shift towards later-stage investments.
Decoding the Early-Stage Funding Decline
The funding surge in 2021-2022 saw investors backing numerous early-stage startups. However, they are now adopting a more cautious approach, waiting to see how existing startups perform before funding new ventures in the same sectors. This cautiousness, combined with the funding winter that stifled early-stage Indian startups (and those across other stages) in 2022 and 2023, has reduced the supply of startups ready for Series A and Series B investments, leading to a decline in the early-stage funding activity. However, pre-seed and seed funding remain stable. The current dip in early-stage funding reflects these past market trends.
Global Factors at Play
India’s startup investment landscape is heavily influenced by foreign capital, which makes up over 85% of the funding. Dollar capital is still slow to return due to global factors like exchange rate fluctuations, uncertainty in global trade policies, and geopolitical tensions. While India has been attracting foreign investments as a part of the China plus one strategy adopted by businesses across nations, many investors view India as a long-term opportunity, but not yet a full replacement for China. As a result, the expected influx of dollar capital into India has not materialized.
Resurgence of Growth-Stage Investments
Growth-stage investments, specifically Series B and C, have risen to $3.5 Bn across 209 deals in 2024 thus far, compared to $3.4 Bn across 225 deals in 2023. This signals strong investor confidence in startups with established products and customer bases. Overall, the performance of late-stage startups has improved in terms of profitability. Investors, including VC firms, are increasingly funding late-stage companies with a clear path to sustainable growth and profitability. The VCs prefer investing in startups that could give them an exit via an M&A or an IPO in the near future, even if that would mean modest IPO valuations. In fact, startups such as Ola Electric offered an IPO price at a 22% discount from its last valuation of $4.3 Bn, while FirstCry chose to maintain a flat valuation of $3 Bn.
Before the funding winter, investors focused on specific sectors, leading to investments in multiple startups within the same sector and increasing competition. However, this trend has reversed as investors shift away from a sector-focused approach. As a result, newer startups in maturing sectors are receiving less funding. VCs are keeping a close watch on how these startsups perform and scale and how the competition shapes up among them, so they could fund select startups at a later stage.
Thoughts
We are glad that the growth-stage startups are benefiting from the strategic shift of VCs and other investors toward later-stage ventures. The Indian startup ecosystem is likely to see more growth-stage IPOs, providing healthy exits for investors in the near future. However, the reduced focus on early-stage funding may impact innovation, as new ventures struggle to secure resources. While this poses a long-term challenge to the ecosystem’s growth, it also pushes early-stage startups to innovate and prioritize sustainable growth and profitability from the outset. Moreover, things may start to look better for the early-stage ventures in 2025, given that the cumulative funding amassed by Indian startups grew by about 20% to $8.7 Bn in the first three quarters of the calendar year 2024.
If you are interested to learn more, feel free to check out this coverage by YourStory.
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Acronyms used in the blog that have not been defined earlier: (a) Venture Capital (VC), (b) Billion (Bn), (c) Million (Mn), (d) Mergers and Acquisitions (M&A), and (e) Initial Public Offering (IPO).