Top VC firms reduce investments in India amid macroeconomic uncertainty

With late-stage funding rounds becoming tougher, they are focusing more on due diligence, profitability path, governance and early entry into companies at lower valuations

Top venture capital firms such as Tiger Global, Accel, Softbank and Sequoia Capital India have moved to small ticket sizes as the funding winter persists. Investments by these large players have come down drastically in 2022 and experts warn that the trend is expected to continue.

The number of rounds that Tiger Global invested in last calendar year (2022) dipped 26.83 from the figure in 2021, according to the analysis by Tracxn. Seventy five per cent of Tiger Global's investments were ‘late stage’ in 2021, at 31 rounds. In 2022, ‘early stage’ and ‘seed stage’ rounds contributed to 56 per cent of its total investment rounds.

The sharpest fall has been in investments made by Accel, once the top investor in India's startup ecosystem. The number of rounds Accel participated in went down by 33.3 per cent YoY in 2022. Also, the percentage share of its investments in the ‘late stage’ dipped from 31 per cent in 2021 to just 19 per cent in 2022.

SoftBank has also limited its investment activity in India. It participated in about 60 per cent fewer rounds in 2022. SoftBank’s average investment in each funding round has also dropped in 2022.

Sequoia invested in 41 per cent fewer rounds in 2022 compared to 2021, according to Tracxn. The round-wise percentage share for Sequoia has remained almost constant in both 2021 and 2022.

“When the bull run was continuing, a lot of money was not only flowing into startups but a lot of venture capital firms such as Tiger Global, Sequoia and Accel had much bigger funds than what they used to operate,” said a top investor, requesting anonymity. “But as the market became volatile at the start of 2022, the pace of investing went down drastically. These investors now want to kick the tyres more, do more in-depth due diligence. Their expectations for entry valuation is much lower than what it was earlier,” said the person.

As many as 58 per cent of founders of Indian startups expect fund-raising to become tougher in 2023 and hiring muted, according to InnoVen’s ‘India Startup Outlook Report. Only 53 per cent of founders had a positive experience while trying to raise funds last year compared to 92 per cent in 2021.

“Due to the current volatile scenario, investors have shifted their interest from late-stage rounds and have started concentrating more on early and seed-stage rounds,” said Neha Singh, co-founder of market intelligence firm Tracxn.

Also global pressure on tech stocks is hurting many of these large players, as several investee firms have seen billions being wiped out in market capitalisation. Softbank has been the worst impacted. Its Vision Fund, which changed the course of VC funding globally, continued to report loss. The third quarter results reported recently saw its loss touch $5.5 billion.

“The fund (SoftBank) was put in a good amount of investment till 2021 but in 2022 they shifted their focus towards monetising their current investments and made many exits in 2022 including Blinkit, Firstcry, Delhivery, and further sold their stake in Paytm,” said Singh of Tracxn.

In 2021, the company had invested $3.2-3.5 billion in the Indian startup ecosystem—almost 10 per cent of the total investment the sector received. For CY22, it cut India investments by 84 per cent from a year earlier.

SoftBank was reaching out to all its portfolio firms as the Japanese fund looked at trimming costs. Sources in the industry said its portfolio firms were told they should look at conserving cash for at least two years.

In India, SoftBank has backed many firms and unicorns, or startups with over $1 billion in valuation. These include Paytm, Oyo, Ola, Lenskart, PolicyBazaar, FirstCry, Meesho, Unacademy, Zeta, Swiggy, Ola Electric, and InMobi.

Industry players predict that the funding winter will persist and the current macroeconomic situation is expected to continue for the next 12 to 18 months.

“Growth and late-stage funding rounds now are much tougher,” said an investor. “The strategy for these large venture capital firms is focusing more on basics, due diligence, the path to profitability, governance and to invest at an early stage in the company at lower valuations. Fundraising activity for various funds has also slowed down.”

Despite the global slowdown, investors are still positive about the Indian start-up ecosystem. One of the reasons is because India focused investors are sitting on one of the highest possible dry powder of around $12.8 billion, says data from Preqin.

“With significant dry powder waiting to be invested, it seems likely that the funding scenario will begin to normalise after 2-3 quarters,” said Amit Nawka, Partner - Deals and  India Startups Leader, PwC India, in a statement recently. “Until then, however, many start-ups are using this time to tighten operating models and optimise their cash runway by deferring discretionary spends and investments.”

Singh of Tracxn said although foreign investments have slowed down, investments in India are expected to increase due to the rapid digitization of processes and increased adoption of digital applications by users.

“Investors have shifted their focus of investment from China to India in the Asian Sub-continent as China is facing strict Covid regulations as well as control over the local tech economy, making India the leading investment hub for VC's,” said Singh of Tracxn. “Domestic investments in India are expected to increase as capital inflow from foreign investors has seen a decrease."

No. of Rounds Participated
SNo.	Investor Name	2020	2021	2022	2023 (YTD)
1	9Unicorns	37	86	45	1
2	Accel	42	68	55	5
3	Better Capital	33	58	56	1
4	Blume Ventures	36	58	54	2
5	IPV	36	53	54	2
6	Matrix Partners India	35	39	29
7	Sequoia Capital	61	87	56	2
8	Tiger Global Management	17	62	48
9	Venture Catalysts	67	75	46	2
10	Y Combinator	46	76	57	3
11	Softbank	5	16	4

					**USD
Sum of Funding Amount of the Rounds where the Investor Participated (USD)
SNo.	Investor Name	2020	2021	2022	2023 (YTD)
1	9Unicorns	475601	663452	113879	61
2	Accel	584426	502761	117789	180
3	Better Capital	455932	465065	122989	27
4	Blume Ventures	498708	471120	108942	162
5	IPV	498080	420510	104131	93
6	Matrix Partners India	481675	320370	65161
7	Sequoia Capital	853998	677527	118703	42
8	Tiger Global Management	230564	458534	119940
9	Venture Catalysts	898969	569535	88755	102
10	Y Combinator	649410	654029	181264	114
11	Softbank	391509489	8813700000	670000000
*Please note that the funding amount is not specific to the investor but to the funding round. It is because we do not capture individual investor contribution in a funding round where multiple investors are present.

Source: Tracxn Technologies Limited