A 'thaw in startup funding winter' as two unicorns emerge within a quarter

A 'thaw in startup funding winter' as two unicorns emerge within a quarter
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  • Perfios and Krutrim AI turned unicorns, while Lohum, The Ayurveda, Cureskin and Hunch raised chunky investments.
  • Many PE and VC funds made a killing in the public markets in 2023, which has fuelled optimism in the private markets, say experts.
  • Investors are warming up, say experts who are cautiously optimistic that funding winter which was set in 2022 might thaw this year.
The year 2024 has been good for many startups, as deal activity is growing at a faster clip. While the funding winter that set in mid-2022 is far from over, there seems to be a thaw, opine experts. Not only did two companies — Krutrim AI and Perfios — turn unicorns, but many more late-stage deals are being closed at impressive valuations.

In the last few weeks, VC investors have been writing checks at a feverish pace. Fintech Perfios raised $80 million and Bhavish Agarwal-backed Krutrim AI raised $50 million — each of these funding rounds valuing them at $1 billion. In all of 2023, only two startups — Zepto and InCred Finance — had turned unicorns.

Apart from unicorn activity, there have been other large deals too. Lithium-ion battery pack maker Lohum raised $50 million, while personal care brands The Ayurveda and Cureskin raised $27 million and $20 million, respectively. Social media discovery app Hunch too raised as much as $23 million.

Signals of revival

The emerging trends could be the beginning of the end of a funding winter, say experts. Pratip Mazumdar, partner at Inflexor Ventures says that the noticeable uptick seen in March strongly suggests a warming trend in the investment climate.


“This observation indicates a possible conclusion to the previously experienced funding winter. The increased deal flow within our purview further corroborates this optimism, signalling a revitalizing market ready for robust investment and growth opportunities,” he adds.

Yet, the Indian startup ecosystem has a long way to go. After spectacular startup inflows of $41.6 billion in 2021, the Indian startup ecosystem made a distinct mark in the global economy. However, funds have been sharply dwindling in the last year and a half. The inflows fell to around $25 billion in 2022 and further dipped to a six-year low of $7 billion in 2023 — one-sixth of 2021 figures — as per a Tracxn report.

“These are green shoots for India's large and rapidly growing market. However, more sustained venture capital activity and successful exits over a longer period will be needed for a more definitive end to funding winter. And, the recent developments are encouraging, likely a cautious optimism — a start to a full-fledged thaw,” opines Rajeev Ranka, Partner at Incubate Fund Asia.

The exit door opens wide

The year 2023 saw the Indian stock market’s bull run, which enthused the primary markets as well. This optimism has flowed into the private markets, explains Anirudh A Damani, managing partner at Artha Venture Fund.

“There has been a buoyancy in the India story. For one, SME IPOs have picked up, and there has been a lot of upstream fishing which has triggered the pre-IPO rounds — which has spilled over to Series A,” Damani tells Business Insider India.

A lot of high-profile VCs like Softbank, Tiger Global, Bain and TPG exited many companies via primary deals (IPOs) as well as secondary market (bulk and block deals) in 2023. That’s made the India startup story stronger.

“These exit events not only underscored the viability and potential for significant returns in venture investments but also contributed to the stabilization of valuations within the market. This has, in turn, created a more predictable and reliable landscape for investors, fostering an environment where confidence can flourish,” says Mazumdar.

Cleanups, not cash burns

The funding winter has also been a wake-up call for many companies as well as their investors – especially those commanding premium valuations. Many listed as well as unlisted companies pivoted to profits, reduced cash burn, and re-calibrated growth strategies. Many of them even tightened belts by reducing staff and other costs, and also agreed to participate in downrounds.

Downrounds are those where a startup raises funds at a lower valuation than it did in an earlier round. Those startups that managed to survive with little or no fundraising also passed the acid test — and that’s attracting more investors into the game.

“Founders who understand the drop in valuations are raising money. Those startups with profitability focus, scalability and are also generating good customer revenues with good reporting practices are in demand,” says Damani.

In the funding boom period, many companies which were getting easy money were burning cash at a rate much faster than revenue growth. As funds became scarce, these practices went away and many of them shifted to positive unit economics.

According to Ranka, these are signs of a more mature ecosystem. “Overcoming the funding winters, many startups pivoted from growth-at-all-costs to profit-oriented growth, and it helped keep the investors' trust. The period of valuation-correction has led to more realistic valuations, ushering the ecosystem to an investor-focused approach to growth,” he adds.

Cautious optimism reigns the ecosystem

Many funds had raised a large amount of capital during the pandemic, and after funding winter a lot of them have been sitting on massive amounts as well — referred to as dry powder across the industry. Yet, funds looking to raise more capital might be hit by a slower translation of interest rate cuts across the globe, a few economies slipping into recession and prevailing high inflation across economies. All in all, global funds wouldn’t flow as freely as they did during the pandemic.

“Limited partners (LPs) are understandably cautious in the current economic climate. While the potential for global rate cuts is a factor, it's not the sole driver of their sentiment. LPs indicate a focus on understanding the underlying fundamentals of businesses seeking investment. LPs are primarily looking for sustainable growth potential and a focus on long-term value creation,” says Ranka.

Here too, there is caution that’s seeping into optimism. “LPs are bullish on India as a market as it’s a rare market exhibiting growth and well poised for delivering good performance as an economy. However they are cautious in picking funds and looking for evidence in terms of past track record,” adds Mazumdar.

Even as the system improves, the odds of startup funding getting back to its former glory this year remain very limited. Even if achieved, it could be a long and rocky path. But the signs of revival are here, and the sector only hopes that the reforms of the winter continue to boost the entire ecosystem towards greater heights in the coming quarters.