- Seed deals are on the rise in India amid a decline in VC-PE funding
- VC and PE funding in India decreased from $62 billion in 2022 to $38 billion in 2023
- India remains the second-largest destination for VC and growth funding in the Asia-Pacific region
- Sectors like consumer tech, fin-tech, and SaaS attracted 60% of total funding in 2023
- Funding landscape faced challenges of inflation, high interest rates, and global economic uncertainties, leading to a decline in the number and size of deals
Seed Deals on the Rise in India
In the dynamic landscape of venture capital (VC) and private equity (PE) funding in India, a notable trend has emerged amidst the overall decline in funding. The share of seed deals is steadily rising, indicating a shift in investor focus towards nurturing early-stage startups. This trend, highlighted in a joint report by Bain & Capital and ICVA, reflects the changing dynamics of the Indian startup ecosystem.
Changing Funding Scenario in India
The report reveals that the total VC-PE funding in India has witnessed a significant moderation, declining from $62 billion in 2022 to $38 billion in 2023. This decline aligns with the global trend of caution towards risk capital, with VC investments in India dropping to 0.4x in 2022 compared to 0.6x globally. Despite the decrease in overall funding, India has retained its position as the second-largest destination for VC and growth funding in the Asia-Pacific region.
The share of fund inflows in India has, however, decreased from 20 per cent to 12 per cent over the period of 2022-23. In contrast, countries like Japan and China have experienced gains in fund flows, signaling a competitive landscape in the region. The report underscores the growing importance of sectors like consumer tech, fin-tech, and SaaS-based companies, which have attracted the majority of funding in 2023 and have become dominant players in the market.
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Challenges and Opportunities in the Funding Environment
The funding landscape in 2023 has been marked by various challenges, including inflation, high interest rates, and global economic uncertainties. These factors have contributed to a decline in both the number and size of deals, with the total number of deals dropping from 1,611 to 880, and the average deal size decreasing from $16 million to $11 million. Mega-round funding for Indian companies has seen a substantial decline of nearly 70 per cent, indicating a cautious approach by investors.
In contrast, smaller-sized deals under $50 million have experienced a less severe decline of about 45 per cent, suggesting that investors remain optimistic about the long-term potential of the Indian market. Many startups have deferred fundraising activities, leading to a slowdown in the emergence of unicorns and a return to pre-2019 levels. Despite the challenges, sectors like consumer tech, fin-tech, and SaaS have remained dominant, although their funding share has decreased as investors have shifted focus towards traditional industries such as banking and healthcare, as well as emerging sectors like electric mobility and generative AI.
Emerging Trends and Opportunities in the Indian Startup Ecosystem
While consumer tech investments have declined from $9.3 billion to $2.4 billion over the period of 2022-23, the report highlights a surge in investments in generative AI, which have increased from $15 million to nearly $250 million. This shift towards emerging technologies underscores the evolving nature of the Indian startup ecosystem and the increasing interest in cutting-edge innovations.
Overall, the rise in seed deals amidst the decline in VC-PE funding signifies a shift towards early-stage investments and a focus on nurturing promising startups from their inception. Despite the challenges posed by the funding winter, the Indian startup ecosystem continues to show resilience and adaptability, with opportunities emerging in new and innovative sectors. As the landscape evolves, stakeholders in the ecosystem must navigate these changes strategically to capitalize on the potential for growth and innovation in the Indian market.
The rise of seed deals in India reflects a broader trend towards supporting early-stage startups and fostering innovation in the ecosystem. While the funding environment may present challenges, it also offers opportunities for investors and entrepreneurs to collaborate and drive the next wave of growth in the Indian startup landscape.
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