During the period from April 1 to May 16, 2022, there were only nine financing rounds of more than $100 million, for a cumulative amount of just over $2 billion, compared to 27 deals of such during the January-March period this year, according to data from New York-based analytics platform CB Insights.
The unicorn rounds that catapulted 42 companies into the once-elusive club in 2021 have also come to a screeching halt. Only 15 startups valued at over $1 billion have emerged this year so far, with April and May seeing just five of those deals.
In addition, the overall capital raised by Indian companies has also decreased significantly over the past two months with $3.82 billion between April 1 and May 16, 2022 across 268 deals compared to $9.93 billion in the last two months. January-March period, according to CB Insights, as unfavorable macroeconomic situations, particularly interest rate hikes by the US Federal Reserve and the rout of technology stocks in public markets around the world depressed sentiment.
Late-stage funding slowdown
By contrast, between April 1 and May 2021, nearly $4 billion was raised from 227 deals in India.
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People in the know said that “big deals are stalled or delayed because investors are in no rush to commit capital when there is no competition for deals.”
Multiple sources with knowledge of the matter said that M&A talks such as “Razorpay’s potential acquisition of payment solutions platform Ezetap have taken much longer to conclude due to the ‘changing sentiment’, while there have been no other ‘deals worth more than $500 million this year’ except Dailyhunt’s $805. million financing and the $800 million financing of Byju,
“Late-stage funding is where we’ve seen a little pause, and most of the ecosystem’s total dollar value comes from late-stage deals. And if late-stage funding slows down, it seems like the ecosystem is slowing down,” said Rahul Taneja, Partner at Lightspeed Venture Partners, who opines that the startup (funding) ecosystem hasn’t changed much.
Emphasizing that “public markets in the United States were a rocket ship over the past two years and have now been overhauled, which has also led to a price correction in private transactions,” Taneja said, “investors want to be sure that companies are now moving to a fundamentally sound business model that will generate free cash flow over the long term.”
The slowdown in late-stage funding was anticipated as early as December 2021, when US tech stocks took a hit. Typically, private valuations reorganize after a lag of four to six months after public markets.
Speaking to ET in March, Rajeev Misra, CEO of SoftBank Vision Fund, said the power of capital had returned to the capital provider after the euphoria of the past two years.
“…if a company is trying to raise $250 million or $500 million, they have a hard time finding the lead investor who will come in with $100 million to $150 million,” Misra said at the time. According to him, the fund had seen in the private markets some investors back down after verbal commitments on deals.
Since then, the environment has only gotten worse.
More time to close deals, mergers and acquisitions
According to an entrepreneur from one of the most popular startups in the country, the liquidity situation in India will become more difficult in the future and added that the situation is relatively more worrying in the United States currently.
“This (Ezetap deal), for example, has been in the works for months and will eventually close, but they (Razorpay) are now doing more thorough due diligence (DD) because there is no rush to close these acquisitions in the current market scenario,” one person briefed on the matter said. He added that unlike last year, companies do not have multiple term sheets for investments or mergers and acquisitions.
E-commerce player Meesho was among companies looking to raise at least $500 million at a valuation of nearly $8 billion, 60% higher than its previous valuation last September. People briefed on his fundraising said a new round was unlikely to close any time soon.
So what’s the next step?
The founders have already shifted gears and are focused on conserving cash even though they recently closed a funding round.
“We knew a collapse was coming, but we didn’t know exactly when… The rainy day that we talked about has arrived now. Even to people who are raising towers now, we tell them to treat this as your last tower and to think of a plan B,” said Sanjeev Bikhchandani, founder of
and first investor in and Policybazaar, which went public last year, adding that “companies with the right unit economics and those that are well capitalized and grow well will survive this (downturn cycle) but startups that need capital and fail to raise it will struggle.”
He also pointed out that “as long as US inflation remains high, the Fed will raise interest rates and that will impact overall funding.”
Inflation and interest rates in the United States are critical factors for funding Indian startups, as large investment deals are driven by foreign investors with a large pool of capital. Last year, India also saw crossover investors taking bets on late-stage Indian startups. These funds refrain from writing aggressive checks. Tiger Global posted losses of $17 billion according to the Financial Times newspaper, while SoftBank chief Masayoshi Son announced earlier this month that it would cut investments significantly this year. These two are among the top unicorn creators in India and the world as well.
“Right now, all companies that were aiming for an IPO within 18-36 months are under maximum pressure to cut costs and make course corrections. For many, the answer is to cut labor costs Even existing investors are pushing their portfolios on the road to profitability and controlling costs,” said Amarjeet Singh, Partner and Country Head, Emerging Giants and Startups, KPMG in India.