2 min read
Saksham Mendiratta
Funding Winter, Seriously?

Everything we know (and don't) about the state of investments in India.

Hey You,

Today’s different. Today’s big for me.

I’ve been writing about different topics across product & design for the past many months. I thought it was time to give this a bit of a spin. This one’s an original research report that would give you more than just perspective of the investment scenario in India.

But before we get to it, here’s for you to forward this to someone who could benefit out of this newsletter. It takes hardly 10 seconds to sign-up.


I’d love to thank everyone (Angel investors, family offices and VC funds) who took time to talk to us through the past 2 weeks. Blume Ventures, Verlinvest, Fireside Ventures, Sprout Venture Partners, Dexter Angels, JSW Ventures, Veda VC, 100X VC, Upsparks.

Let’s dive in.

The purpose of this explanatory report is to see through and declutter the reported content which highlights and speaks about the ‘Funding Winter’ the Indian start-up ecosystem is supposedly in.

The key questions we asked were:

  • Is this really a funding winter?
  • Why could this be happening now?
  • How long would it last?
  • What do seasoned investors think and perceive this as?
  • How to make sense of it? and finally
  • What should be done about it?

Our Vantage Points:

The research undertaken to formulate the hypothesis statement is categorised under two main perspectives:

Part 1: Changing investment trends (globally and in India)

Part 2: Macro-economic factors gripping the Indian economy

The former (Part 1) is a construct on the data so far on the change of funding throughout 2022 aiming to build a case for the evidence of a ‘funding winter’ or a slowdown while the latter (Part 2) aims to connect the macro economic variables to further understand and rationalize Part 1.

Strap yourselves for this one.

Part 1 : Changing Investment Trends

The tone and narrative which were commonly observed in the secondary data that was referred to for this report were indicative of an evident downturn of the start-up ‘boom’ that the Indian economy observed post the pandemic, in the years 2020 and 2021 specifically.

Investments in private markets, especially for early stage start-ups were fuelled by the preceding IPOs that gave India it’s first generation of start-ups to see the through to a public offering exit, adding confidence to the average retail investor who interacted with these as a consumer once and a renewed influx of foreign capital.

In 2021, a total of 1625 deals were observed summing up to $38 Billion in total with 43 startups turning unicorns. Amongst these growth/late stage start-ups there were 380 deals totalling to $34.3 Billion while early-stage start-ups raised $3.68 Billion over 948 deals in 2021, that was $11.1 Billion more in the overall capital startups received in 2020.

(Graph depicts the Comparative Increase in the value of Indian start-up investment deals. Includes only PE/VC investments - as of release date : Mar,2022)

However, the first half (January till June) of the year 2022 saw a total of $17.1 Billion raised across 891 deals, which was 82.8 percent more than H1 2021, questioning the ‘funding winter’ and its basis of existence in total. With only a difference of $5.6 Billion, as compared to 2021 totaling 865 deals for a sum of $22.7 Billion.

Further evidence can be observed by the H2 of 2021 that saw the maximum value and number of deals bringing in more than $30 Billion over Q3 - 2021 and Q4- 2021 with $17.1 Billion and $14.5 Billion respectively.  Now those are some staggering numbers that India had never seen.

(Graph depicts Quarter wise Funding in the 2021, with the deal count and funding value)

On the other hand, recalling the question of the ‘funding winter’s’ existence, the numbers that followed post Q4 of 2021 into Q1 2022 saw a slowdown as the months progressed into H1 of 2022.

(Graph depicts Month on Month Funding Data for 2022)

Though-out Q1 of 2022 there was a steady decline, the concerns were evident over the Q2 of 2022 with the lowest every being the month of July 2022 at $1.1 Billion only, thus proving an evident slowdown or a ‘funding winter’ with a reduction of 40% in total value against Q1 to Q2 of 2022.

Therefore evidentially concluding : The winter was relative. Slowdown of the funding volume and deals over Q1 & Q2 of 2022 as compared to the trends observed in Quarters of 2021.

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Part 2 : Macro-Economic Factors

This part attempts to rationalize the data observed in the previous part of the report by touching upon the factors and variables responsible. These factors and variables though classified as macro-economic indicators could also present to have a duality in their context which will be explicitly mentioned and highlighted for the purpose of this study.

A) Ukraine-Russia War and BRICS Market Volatility

The Asian continent is under multiple stressors of variable magnitudes which don’t seem to have a solution anytime soon. As a consequence of the war between Russia and Ukraine the global supply chains have been tensed which have fueled the global inflation as we know it and along with China imposing multiple restrictions due to still on-going Covid-19 has further impacted the production. Thus, making the BRICS market, (i.e. Brazil, Russia, India, China and South Africa) highly volatile. This has promoted more speculation and negative investment sentiment in a macro - public market perspective; which is one of the main reasons for the FPI and FII withdrawals observed over the last 8 months. Taiwan, South Korea and Philippines are also emerging markets that have observed a similar trend.

B) Stronger USD against Rupee and FII-FPI Withdrawals

Over the previous 2 quarters of the year 2022, a total of INR 215,102 Cr from the Indian markets has been withdrawn. This is almost triple of what was withdrawn (INR 91,626 Cr) in 2021.

The withdrawals are also a direct reaction to the depreciating value of the rupee, along with the hike in the repo rates by the RBI. Appreciation of the USD in comparison with any emerging economy’s currency is not favorable and thus will continue to trigger more withdrawals over the next few months, before the volatility is minimized.

C) Rising Global Inflation and Higher Interest Rates.

In a macro-economical scope of reference, the public markets behave differently as compared to the private markets. In relation to the performance of global public markets to a local private market, in this context, ‘The Indian Start-up funding when seen as a private equity asset class’ is not immune to the change brought about by the rising interest rates and its direct correlational yield to the bond yields, thus driving money away from emerging markets such as the one under discussion to a much safer US bonds. Adding to this behavior, a cause for observable concern is the pace with which inflation has grown over the past year is more than the past 40 years, with an 8.5% bump in the consumer price index, sharpest YoY increase since 1981.

D) Liquidity of Capital and Valuations

All the above cumulative factors have directly influenced the liquidity of capital in the Indian market, evidently creating a gap of capital in the public markets. However, this has brought about a supposedly positive change in the Indian start-up funding.

Valuations and size of deals have shrunk or ‘normalized’ as compared to the figures rolling out the year before (2021). As evident in Part 1, the volume and quantity of funding is considerably gone down, which could strongly be pegged as a behavior of ‘cautious allotment of available funds’ by existing investors in the PE & VC markets.

Additional rationale for this shrinkage could be attributed to the valuation explosion across all stages in the previous year from 15-20% for seed rounds, due to a surplus of funds and investors willing to invest, specific to this part as a variable.

When viewed stage-wise across the years 2021 and 2022, the data also supports the flourishing investments in the early stages, categorically Seed and Series A with an 88% and 22% increase respectively.

(Graph depicts Seed & Series A rounds in Q1 of 2021 vs 2022)

Which brings out a contrasting perspective on the growth and late stages which have seen a more considerable impact of the public markets seeping through to affect their valuations and frequencies of raising subsequent rounds pre-IPO. Owing to the prevailing market conditions, another aspect to consider is the over- valuations of unicorn start-ups that went public and their predecessors stalling their IPOs for a more favourable market condition with revised valuations.

Evidently Concluding : FPI & FII trends and macro-economic conditions are direct influencers on private market funding in the Indian start-up ecosystem and Lower Valuations over recent funding rounds across all funding stages, and stalled IPOs strongly indicating a funding slowdown/winter.

Hypothesis Statement:

The funding winter in Indian Start-up Ecosystem is a phase where the market is correcting itself.

Here’s a recap of WHY:

  • Slowdown of the funding volume and deals over Q1 & Q2 of 2022 as compared to the trends observed in Quarters of 2021.
  • FPI & FII trends and macro-economic conditions are direct influencers on private market funding in the Indian start-up ecosystem.
  • Lower Valuations over recent funding rounds across all funding stages, and stalled IPOs strongly indicating a funding slowdown/winter.

But we didn’t judge a book by it’s cover. We went into the pages.

The above hypothesis is tending towards ‘TRUE’, i.e. secondary data is indicating a slowdown but for the better, better here is defined as a more profitability centric revision on valuations which is observed by the anomality of the funding rate in Early Stage Start-ups.

The duration or predictability on how long and deep will it last is currently scattered, with reports saying the following Q3 & Q4 would be slower for growth and late stage investments.

There is also indicative evidence that points towards lesser Unicorns through the next year as well. Existing Unicorns are pushing for profitability by cutting costs through letting go of resource and lesser marketing & acquisition expenses.

What should we expect next?

A) Normalization:

Public Market’s influence on Private markets - The reduced liquidity of funds with investors as compared to the previous two years have a sentimental context with a sense of conservation of capital, by investing in other asset classes which are more stable and cushioned as compared to the asset class of private market investment in start-ups, it can also be seen as a reaction to the blip in a risk appetite that investors had post 2020 pandemic and the validations the saw in the 2021 boom. The overall availability of capital can be better positioned as a more cautious and calculated allotment for those start-ups which display more than their baseline markers to inspire investor confidence.

B) Taper Tantrums

Cyclical nature of economic modulation undertaken by governments to ease the economies quantitatively, where we were in a state of constant climbing interest rate which was influenced by Covid-19 as the economy needed to be babied back to a baseline, once the signs of those baselines became visible in post Covid-19, 2020 and 2021, the interest rates were increased to make up for the surplus created at that time when the consumption were the lowest and speculation was highest, think of the Covid-19 era policies being corrected and withdrawn. Similarities to the 2013 trend could be observed in 2022 when the conditions of the funding ecosystem were similar to what they are now, markers such as mass firing in start-ups, closing of funded start-ups at their growth stage and acquisitions were a few to be observed which are relevant to the current context. The behaviour of a taper tantrum in 2013 had a similar reaction from the FPIs pulling out and the rupee falling over 15% between late-May and late-August 2013, subsequently leading the RBI to raise interest rates in an attempt to cap the outflow.

However, this time the Indian economy is much better equipped to better control the taper on their terms, from being in one of the ‘Fragile 5’ economies in 2013 to commanding the 4th largest foreign currency reserves, along with low current account deficit, stronger exports and a much robust domestic investment ecosystem.

C) Course Correction

Stage-wise correction - those closer to the public markets are the most turbulent. Which is the why the growth and late stage start-ups are most impacted, and early stages have undergone a minimum change and are almost unaffected, seeing an opposite trend of increased funding value.

However the news is positive in terms of the consistency of funding across stages with a correction in the size, frequency and valuation of rounds. This is mainly attributed by smaller deal sizes, and increased rarity of mega rounds leading to a revision of the valuations seen across all stages irrespective of the sectors.

D) Cyclical Nature of Economies

Growth as normal if Covid-19 never came -

Leaning on the taper tantrum of 2013, the Indian start-up investment behaviour grew steadily backing on the first generation start-ups which pulled through on the basis of their strong business models and innovative acquisition models, thus boosting investments and infrastructure in the early stages from 2012 to 2015, with a downturn in the years 2017 and 2018 which were a cyclical stage of maturing stages.

(Graph depicts Investment Behaviour over the last decade)

As the country saw its first few IPOs by the first generation start-ups in the years before Covid-19, it again boosted confidence in the ecosystem. Only to be stalled by the Covid-19 pandemic in the 2020 which halted the natural growth trajectory Indian private investment ecosystem was headed in.

Thus building a case, to highlight that the deals that were stalled and the sentiments that were conservative, when the economy was showing positive signs after the 2nd wave in 2021, fuelled a concentration of deals within the H2 of 2021.

ASSUME that Covid-19 never happened, hypothetically, this concentration would be normalized and distributed across 18 to 24 months over 2020 and 2021, when presented with number of deals as the only variable in an ideal situation.

An Anomalous 2021

When observed through the scope of numbers and investments, 2021 does seem like an anomaly as made evident in the Part 1 of this study’s literature review. This section, presents the factors that were responsible for this boom or upward spike, touching and explaining the positive validations brought by the pandemic, its effects on the availability of funds and investors in the private market and the businesses that were created during this said timespan.

Just before we finally conclude, here are some validations that businesses got, while operating in the post pandemic era:

The adoption of technology saw a massive validating increase which meant an early and amped validation of certain business models which would have generally taken some more time to mature. The availability and ease of online transactions and its rapid adoptions also created many more business models and the pandemic in general came with a new set of problems that needed to be solved. Thus, summing up the boost of users and adoptability seen in existing start-ups and presenting newer challenges and problems that created more businesses and start- ups.

More funds and investors emerging with start-up investments specially in the pre- seed, seed and pre-Series A funding rounds being an attractive asset class for non-traditional investors. As the data highlights, the availability of capital was a major contributing factor for the increase in number of deals and size of rounds which was a direct variable of more investors willing to invest the start-up ecosystem. Due to the early success and validations of certain sectors like Ecommerce, EdTech and Fintech supported by the success of late stage start-ups and potential pre-IPOs, it inspired a sense of renewed optimism that directly reflected on the numbers post H1 of 2021.

More Credible and experienced repeat entrepreneurs starting up in 2020 and peaking in 2021, who raised funds in their peer groups and institutions as they were deserving and credible having seen the entire business life-cycles up- close from their alumnus organizations. This was a direct correlation of the effects of the ‘Great Resignation’ that precipitated from the west to India and influenced the ecosystem by adding worthy individuals to create businesses adding to the economic infrastructure of the country through jobs and consumption overall, an underlying reason could be a deep imbedded psychological factor that validated pursuing aspirations possibly triggered by the pandemic on human psyche when seen in a macro socio-economic perspective along with the business and market conditions being favorable for sealing this transition.

Finally, answering the existential questions that you've been waiting for.

Things we learnt from this Funding Winter:

A) Valuations

For early stages are direct proportional to qualitative output.

For Growth Stages are directly proportional to quantitative output.

With recent sector based valuations being an auxiliary factor of influence on the final valuations.

Eg: Indian SaaS based businesses serving and selling in the Global markets raising a valuations of 30to 50multiples of their Annual Recurring Revenue previously are currently at 8to 15multiples of their Annual Recurring Revenue.

Similarities to the 2017-2018 are seen right now in 2022.

So what’s the bottom-line?

Valuations auto-correct all the time, and while they undergo these corrections, the market-share a business commands or will potentially move to command are what investors bet on.

B) Investments

Bridge Rounds Indicators : Investors are backing and bulletproofing their current investments aka portfolio companies to aid their investments to a fruitful exit. Thus, reducing the size of capital going into later stage that is reflective in smaller rounds and redirecting them to bridge stages.

n(Deals) ∝ t

Where t, is time taken for completion of deal.

Therefore, lesser number of deals in 2022 is indicative of more time taken by investors to scrutinise and make decisions. This does not mean that time wasn’t taken to vet and decide to invest earlier, however here the variables that influenced the have changed from what they previously where.

Eg: Previously (in reference to 2021) a great product and founding team were the underlying variables for decision making, Now, a great product with a strong business model and quantitative validation along with resilient founders are the variables.

So what’s the bottom-line?

Comparatively reduced ticket size with a considerably longer time to close rounds, with longer runways than what was the baseline previously.

Rationale replacing FOMO, as investors now are in a much favourable position with more refined variables for decision making.

C) Markets

Here, ‘Markets’ is used as a generalization of the Tier 1 Indian demographics and consumers which are the major revenue derivatives of B2C and B2B Indian start- ups.

i) Rising CAC: Directly correlational to multiple players addressing the same demographics across similar sectors and products, creating a surplus of options for consumers making acquisition expensive. Acquisition costs being a direct function to profitability and cash burn of a business, is one of the first variables observed by investors in current market conditions placing it higher as a variable for making decisions before investing.

ii) Adoption Saturation: Maturity of the Tier 1 markets, in terms of adoptions and dependence on digital solutions for almost everything saw a huge positive during the pandemic and showed no signs of slowdown post that, thus boosting the digital maturity of the market. Now, these markets are saturating leaving start-ups with new sets of problems while consumption remains high as ever. Lining up Tier 2, Tier 3 and the Bharat market for the grab, where investments have seen growth.

So what’s the bottom-line?

Though markets specifically India are no immediate concern for investors and hold a huge potential yet to be discovered, the way start-ups seek to generate revenues through this market and display strength of business fundamentals have the investors’ attention.

D) The Big Picture

Indian Start-up Ecosystem in the big picture is heading for the win.

Signs of Maturity

Ecosystem sustaining self - Founders turned Investors, investing and guiding the next generation of founders through the journey which was directly correlational to the behavior observed in 2021 from founders and investors alike.

IPOs will be more calculated and successful, one of the strongest positive signs that brought confidence in the start-up ecosystem.

Closing Thoughts

Efficiency = Maturity, establishing the direct correlation.

The more efficient an economy becomes in terms of their infrastructure, seen by the adoption of online payments via UPI surpassing all developed economies, it is reflective of an economy and as demography maturing.

Resource - Value Parity

Innovation - Climate Tech, Space Tech, AgriTech as emerging sectors that are raising early stage funding in 2022 are indicative of a new curve of sectors and start-ups that will be maturing by the end of this decade, similar to the post taper tantrum curve of 2013.

I hope you had a good read in here. Well, that’s it from me today.

Until next time,

With Gratitude,


(In case anyone wishes to check on the research methodology and references used in this report, here is all the relevant information that you would need)

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