Fund crunch may haunt startups

Scarcity of Funds

- In 2021, domestic startups raised a record $38.5 bn

- Almost 1/3 fall in fund raising this year so far

- Many startups laying off employees

- India home to 100 unicorns, out of which 23 are profitable so far.

Bengaluru: Domestic startups may be staring at a situation where in raising funds will be tough this year as fund houses become cautious owing to inflationary environment, geopolitical turmoil and tightening policy rates across the globe.

Company officials said that the new age startups are being scrutinised closely now than last year when Indian startups had raised record amount of money despite the pandemic.

"Fund houses definitely are more cautious now. There are a lot of rationalisations that have happened in terms of valuation expectations (of promoters) and funding frequency (of fund houses). The exuberance of last year is nowhere," V Balakrishnan, Cofounder & Chairman of VC firm, Exfinity Venture Partners, and former Chief Financial Officer & board member of Infosys told Bizz Buzz.

"Large rounds of fund raising, (especially series B onwards) may see a slowdown. Also, fund houses will scrutinise early-stage startups more vigorously than earlier before committing money," he added.

In 2021, domestic startups had raised a record $38.5 billion. During January-March period of this year, fund raising stood at $10 billion as compared to around $6 billion raised during the same period a year ago. But there has been a visible slowdown in fund flow to startups from April onwards.

However, anticipation of scarcity of funds is already visible. This has led to many startups laying off employees in the recent months.

Companies like Unacademy, Meesho, and Trell had let go of employees due to change in growth expectations. Similarly, the pace of unicorn formation has gone down in recent months.

"It is ridiculous how quickly the expectations changed from growth at all costs to generating free cash flows to survive the next 2-3 years since raising funds might be tougher," wrote Nithin Kamath, Founder &CEO of brokerage firm Zerodha on social media platform, Twitter. He also said that high wage cost faced by startups would see a correction if the funding situation became tight.

India is now home to 100 unicorns out of which 23 are profitable so far. Not only Indian startups have raised record amount of funding last year, some of them have also gone public. However, stock prices of these new age companies have corrected sharply in recent months owing to overall correction of Indian exchanges.

"Fund managers will be cautious in funding loss-making entities as the funding situation tightens due to global inflation," said Balakrishnan of Exfinity Venture Partners.

There are a lot of rationalisations that have happened in terms of valuation expectations (of promoters) and funding frequency (of fund houses). The exuberance of last year is nowhere

- V Balakrishnan, Chairman of Exfinity Venture Partners, and former CFO & board member of Infosys