The year 2022 was a difficult year for entrepreneurs due to the funding winter. To tackle growing inflation, central banks across the world raised interest rates, which made the capital costlier. Experts said this trend would continue for the late-stage companies for the next 2-3 quarters.
Ajay Jain, co-founder and managing partner at Silverneedle Ventures, said, “The venture capital industry is adjusting to the market cues, late-stage funding especially has taken a hit – almost 70 per cent decline in funding at that stage in AY22 versus AY21. This trend would continue for the late-stage companies for the next 2-3 quarters. In the seed stage, the trend is actually positive – large funds are also deploying funds at this stage but valuations are more rational & investors are looking at value-based metrics.”
Jain added that one key trend that would continue in the Indian startup ecosystem is of merger and acquisitions (M&As), almost 240 M&As happened in 2022. Information technology would really help if the budget ensures clear and transparent policies for M&As, while ensuring the capital gains for unlisted shares are treated at par (or actually lower) than listed shares.
In 2022, leading venture capital firm Sequoia Capital told founders of its portfolio companies that the era of being rewarded for hypergrowth at any costs is quickly coming to an end with investors shifting towards companies who can demonstrate current profitability.
“Capital is becoming more expensive while the macro is becoming less certain, leading to investors de-prioritising and paying up less for growth,” it said.
Due to the funding crunch, startups across the world, including in India, have resorted to layoffs to cut costs.
Pearl Agarwal, founder and managing director at Eximius Ventures, said, “The year 2022 was a difficult year for entrepreneurs. In order to tackle growing inflation, central banks across the world raised interest rates. This reduced the capital in circulation, which trickled down to private markets as well. Early-stage deals were still unscathed as compared to later rounds.”
He added that for the upcoming Budget, it is expected that policies would encourage overseas investments among Indian startups, so that they can truly build from India, for the entire world.
Jatin Desai, co-founder and managing partner at Inflexor Ventures, said, “Venture capital in 2023 can be best described as cautiously optimistic. After a tumultuous 2022, more investors are looking to come back to the private markets with large amounts of capital ready to be deployed in the VC space. Investors are now on the lookout for more sustainable business models with strong fundamentals instead of high-growth, cash-guzzling start-ups.”
He added that in the Budget, the government’s support for the start-up ecosystem over the past few years is hopefully continued and be reinvigorated. Special attention should be paid to supporting core technology innovation where India must invest to develop indigenous capabilities for resilient future growth in the coming decades.
“This can come in the form of a further expansion of the fund-of-funds program, continued budgetary and regulatory support to AIFs for setting up in and operating from GIFT city, the allocation for the development of new technology incubators, grants for indigenous tech start-ups in critical sectors, etc. Given that the ecosystem has matured considerably over the past decade, there is a growing expectation that private market gains be taxed in parity with the public listed markets,” Desai said.
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