As Indian Startup Funding Plummets to a 9-Month Low, Companies Take Drastic Measures for Cost-Cutting

Deal volume and funding activity for Indian startups declines to a nine-month low in April. This signals a persistently challenging business environment for these companies. Startup ecosystems in India are going through turbulent times right now. India reached the milestone of housing 100 unicorns in 2021. However, within two years of reaching the milestone the situation for Indian startups has become a lot more difficult in the changing business sentiments across the country. 

Deals in April and High Valuations

The startup ecosystem has been experiencing a protracted financing drought as a result of increasing interest rates, global recessionary financial circumstances, volatility in the stock market, and the re-rating of technology companies. This has made investors apprehensive resulting in a significant decrease in the volume of money available for businesses.

In April, angel investment and venture capital funds investing in Indian firms totalled $381 million across 58 contracts. According to statistics collected by VCCEdge, VCCircle's research platform, this was the lowest level since April 2014, when 50 deals for $108 million emerged.

Concerns about overly high startup valuations have also caused a reconsideration of investments, with several investors being more picky regarding which companies they deploy their funds to. This additionally led to a drop in fundraising and deal-making operations within the Indian startup sector. In April of this year, 1.9 transactions were signed on average every day. Data for the month show that deal-making was at its lowest this year since 2015. On a month-on-month basis, deal-making in April was also the lowest in 2023.

In April of the previous year, Indian entrepreneurs closed 146 deals totaling $3.3 billion. In comparison, total financing for 2023 has yet to exceed the amount amassed in April 2022 alone. The amount invested for March 2023 in startups was recorded at $1.1 billion, over twice the revised figure of $482 million observed in February. However, this is under fifty per cent of the total value of transactions reported in March 2022. 

2021 Boom and Making of Unicorns

In 2021, financing for startups in India skyrocketed as venture capital and private equity investors pumped billions of dollars into domestic firms. In 2021, India reach the milestone of housing 100 unicorns, or firms with an estimated value of $1 billion or more. However, as stock markets plummeted and central banks raised the rates of interest, anxiety about inflated valuations surfaced, affecting startup fundraising activities.

Some business owners predict that the market's downward trajectory will persist unless worldwide macroeconomic conditions improve considerably. Due to investor caution, the quantity of transactions being made has reduced recently, and the course of deal-making has reduced throughout each tier in India. Startups in India are adopting a default-alive approach till the scenario changes. 

Job Cuts in the Startups

Due to a lack of funding, numerous firms have had to implement harsh measures to reduce expenses, including layoffs. SoftBank-backed e-commerce company Meesho laid off 15% of its overall staff, or almost 251 individuals, this past week. It was Meesho's third wave of cutbacks in approximately a year. In August of last year, the firm let off over 300 employees from its FMCG vertical Superstore, which was operating in six different states at that point in time. It also laid off roughly 150 people in April of last year. Meanwhile, online math tuition platform Cuemath on Monday announced laying off 100 employees or nearly 12.5% of its 800 people staff. 

The Indian startup ecosystem is going through torrid times at the moment. It is imperative for the country’s economic growth that startups do well as they contribute significantly to the GDP of the country. Moreover, a decline in funding for startups may demotivate new entrepreneurs which can ultimately spiral into a bigger crisis. It remains to be seen how the startup sector bounces back, as the global macroeconomic situation is estimated to improve by the end of this year.