India accounted for 20 per cent of all venture capital (VC) funding in the APAC region for the first time in 2022, even as the year was defined by a capital market slowdown. In global terms, 5 per cent of all VC investments flowed into India, according to IVCA and Bain & Co.’s new ‘India Venture Capital 2023’ report. Much of this growth was driven by the world’s China-plus-one strategy as well as India’s own rapid adoption of internet-enabled services. For the second year in a row, India also added more unicorns (23) than China (11). This, despite the fact that no new unicorns were added by India in the last quarter of 2022.
Even though funding momentum slowed across the world, with total deal value declining 33 per cent from $38.5 billion in 2021 to $25.7 billion in 2022, “India continued to demonstrate resilience to global headwinds as structural enablers drove a positive economic outlook,” Bain & Co. stated. The decline in volume was primarily driven by average deal size compression from $25 million to $16 million over 2021–2022. Add to that, there was a significant drop in the $100 million+ deals from 92 to 48 over 2021–2022 as VCs exercised caution on large-ticket deals.
But the India growth story continued to attract new investors because of “structural enablers”. “These include India’s large consumption potential, inclusive growth led by large-scale digital adoption of the decentralized India Stack, effective fiscal and monetary policy discipline limiting inflationary growth, and tailwinds from economic activity shifting away from China,” according to the report.
Even though the value of deals fell, deal volume saw a 1.1x growth, led by an expansion in seed-stage to Series B deals. VC funding also continued to be more spread out, with new emerging startup hubs beyond Bengaluru, Mumbai, and Delhi-NCR receiving ~18 per cent of the capital, and accounting for 9 out of 23 new unicorns in 2022. Rajat Tandon, President, IVCA, said, “While 2022 marked a year which heralded PE/VCs to adapt in the face of unprecedented challenges; it also went on to witness record fund-raising and all-time high available dry powder. This only reinforces global investors’ confidence in India to be one of the few bright spots of growth. We remain optimistic about the long-term growth prospects of the industry and its ability to navigate uncertainty, identify opportunities, and support India's dynamic entrepreneurial ecosystem.”
SaaS and fintech were the most funded sectors last year. Among the sunrise sectors, Electric Vehicles recorded a 2.4x growth in funding enabled by regulatory support as well as increasing activity across the EV value chain in India. There were also key early-stage deals in sectors like agritech, spacetech, Generative AI, and Climate-tech, among others.
However, consumer tech (which includes e-commerce, edtech, D2C, food delivery, etc.) saw a 55 per cent drop in funding, from more than $20 billion in 2021 to less than $10 billion in 2021, as investors pressed for better unit economics and a path to profitability.
Early-stage deals continued to grow even as late-stage funding was impacted by the slowdown. More than 80 per cent of deals for top funds, including Sequoia Capital, Accel India, and Lightspeed Venture Partners, were in early-stage companies in 2022. “While most leading VCs saw a compression in the deal activity, salience of early-stage investments by these funds within respective portfolios increased,” Bain stated.
The micro-VC ecosystem expanded as well, with several launching new funds like the Artha Select Fund (corpus of $55 million), Auxano Fund (corpus of $25 million), and others. Family offices, corporate VCs, and first-time funds too remained active, participating in 300+ deals.
Commenting on the outlook for 2023, Sriwatsan Krishnan, Partner at Bain & Company, said that the year will see the emergence of a more resilient ecosystem as stakeholders remain cautiously optimistic. “Investors are expected to double down on early-stage deal making, and innovation in emergent spaces such as gaming (hyper casual games, e-sports), healthtech, EV and AI-led use-cases are likely to see interest. SaaS and fintech will remain significant. While regulatory oversight may have some impact on Fintech, focus on globalization of the India Stack is likely to open up new avenues,” Krishnan shared.
“Participation from a wider investor base (micro-VCs, family offices, global funds foraying in India) is also likely to sustain,” he added.
Also Read: CCI approves Reliance’s acquisition of METRO Cash & Carry India; check details here
Also Watch, WPL 2023: RCB - Women vs UPW. Check Key Players, Where To Stream WPL For Free & More