Indian startup funding experienced a significant decline of 36% to $3.8 billion in the first half of 2023 (H1 CY23), the lowest in the past four years, according to a report by PwC India. Investors are now conducting more extensive due diligence, resulting in longer funding processes. The report highlights that early-stage deals accounted for 57% of the total funding volume in H1 CY23 but constituted the lowest percentage in value compared to the previous two years.
Decline in Funding and Emphasis on Due Diligence
PwC India’s report reveals that the Indian startup ecosystem witnessed a notable decrease in funding during H1 CY23, reaching a six-month low of $3.8 billion across 298 deals. This represents a decline of nearly 36% compared to the funding received in H2 CY22 ($5.9 billion). The due diligence process has become more comprehensive, covering various aspects of the business, including finance, legal, technology, HR, and business processes. Investors are now prioritising a robust corporate governance framework.
Shift in Early-Stage Deals and Funded Sectors
While early-stage deals accounted for the majority of funding volume (57%) in H1 CY23, they contributed to approximately 16% of the total funding in value terms. This percentage was the lowest recorded in H1 CY23 compared to the past two years. The report highlights that fintech, Software-as-a-Service (SaaS), and Direct-to-Consumer (D2C) sectors continued to receive significant funding in H1 CY23. These sectors have consistently attracted investors due to their growth potential and market demand.
Investor Support and Future Outlook
Despite the challenging funding market conditions, investors have shown strong support for their portfolio companies. They have reinforced their investments in startups that have demonstrated positive growth. Amit Nawka, Partner-Deals and India Startups Leader at PwC India, assures that a decline in funding is just a temporary phase in a startup’s journey. He anticipates a pickup in investment pace in the coming months, as active venture capitalists in India have secured new funds recently. The due diligence process has become more rigorous, encompassing various aspects to ensure robust governance frameworks.
M&A Transactions and Sector-Wise Investment
The report reveals that while venture capital (VC) funding declined in H1 CY23, M&A transactions remained steady compared to H2 CY22. Eighty M&A deals involving startups took place during this period, with 80% being domestic transactions. SaaS, fintech, and e-commerce sectors were the most active in terms of M&A transactions. SaaS had 23 deals, fintech had 11, and e-commerce had 10 transactions. SaaS, D2C, fintech, e-commerce, and logistics were the top five sectors that attracted the most funding during H1 CY23, collectively accounting for approximately 89% of the total funding.
Key Startup Cities and Funding Distribution
Bengaluru, Delhi-NCR, and Mumbai remain the prominent startup cities in India, representing around 83% of the total startup funding activity in H1 CY23. However, funding activity declined across all cities, except for Chennai, which witnessed higher funding specifically in the SaaS space. The report emphasises that despite the overall decline, these cities continue to be the primary hubs for startup investments.
Conclusion
The PwC India report sheds light on the decline in Indian startup funding during H1 CY23 and the increased due diligence being conducted by investors. While the funding landscape may currently pose challenges, the report predicts a potential upswing in the coming months, as venture capitalists leverage their available capital reserves. This temporary slowdown emphasizes the importance of robust corporate governance and underscores the need for startups to adapt and persevere through changing market conditions.
