Investors take larger bets in fewer startups as funding winter lingers

The total quantum of funding has remained flat at $3.9 billion in the first five months (January-May) of 2024. Though the fundraise has been flat year-on-year, the good news is that it has not dropped as it did in the past few quarters.

However, though the fundraise has been flat, the deal activity has fallen, signifying the trend that deals are being scrutinised.

Deal activity has fallen 39 per cent to 465 deals this year, compared to 758 deals in the same period last year, according to data from Tracxn – a market intelligence platform.

“The current investment landscape is undergoing a strategic shift. Investors are now prioritising startups capable of delivering a return on capital employed (ROCE) that surpasses their expected ROI, thereby creating substantial value for shareholders and founders alike,” says Anirudh A. Damani, managing partner, Artha Venture Fund – a micro-VC fund.

This shift, Damani says, is steering capital away from the perpetually cash-burning startups towards those demonstrating strong customer acquisition, retention, and upsell capabilities – a major contributing factor to the decline in deal activity.

Larger cheque sizes

Nevertheless, while the market is seeing fewer deals, the ones happening are significantly larger. The average deal value has increased 40 per cent to $10.1 million so far this year, compared to $6.1 million in the year-ago period, Tracxn data signposts.

“Investors are gravitating towards winners with larger cheques. Within our own portfolio, we see category winners that have scaled and are profitable, attracting multiple term sheets when they step out to raise between $35 million to $50 million (rounds),” says Vikram Chachra, founding partner of fintech-focused VC fund 8i Ventures.

Investors say that these “winners” primarily include companies that have demonstrated the ability to scale, achieve profitability, and create shareholder value through disciplined and capital-efficient operations.

“Investors are more comfortable deploying significant capital into these businesses because they’ve seen them grow and succeed. They want to secure their stakes before others do, ensuring that the top-performing companies get the necessary funding to maintain their momentum,” Damani adds.

Thaw in the funding winter

According to Tracxn, the Indian startup world witnessed its lowest-funded year in the last five years in 2023 at just $7 billion, a 72 per cent drop from $25 billion the previous year, amid the so-called funding winter.

This drop was most pronounced in the late-stage segment, where investments fell 73 per cent during the year.

The larger cheque sizes in 2024 so far have, however, led to a slight resurgence in late-stage funding. Investments have increased from $2 billion across 53 deals to $2.1 billion across just 39 deals.

Investors are of the view that the funding winter is now starting to thaw. The second half of 2024 is, therefore, expected to witness a revival in funding across stages as cheque sizes continue to increase.

Says Sukhmani Bedi, partner at Orios Venture Partners – an early-stage investment firm: “I expect deal activity to improve significantly this year. We are seeing an increase in the number of high-quality startups across sectors. There’s ample dry powder ready to be invested in these promising ventures.”

The funding environment is expected to further improve after the 2024 Lok Sabha elections conclude.

“With the election results expected on June 4, investors will have the clarity needed to make long-term strategic bets. I anticipate a robust second half of the year, with the SME and IPO markets reviving investor confidence,” says Damani.

First Published: Jun 02 2024 | 7:30 PM IST