Global venture funding in startup witnesses decline

Startup funding has been drying up of late. The total global venture funding in 2022 reached USD 445 billion, witnessing a decline of 35 per cent in comparison to USD 681 billion startups received in 2021. The declining trend seen in 2022 continued into 2023.

Based on the startup tracking platform Tracxn, a total of USD 1.1 billion went into startups in South Asia in the first quarter of 2023. It is 69 per cent lower than the same quarter last year and down 42 per cent in comparison to Q4-2022.

Across the region, seed-stage investments decreased 27 per cent year on year and 73 per cent month on month. However, it is interesting to note that the average deal size for late-stage investments was higher.

For Q1-2023, this stood at USD 83 million in comparison to USD 61 million from the same quarter last year, and USD 68 million in Q4-2022. This may be a result of a flight to quality as well as venture capitalists betting on firms with more certain futures. Segments that received the highest funding in the first quarter of this year are fintech, insurtech and auto tech.

According to data from Crunchbase, total global venture funding began to witness a decline in Q1-2022 from its peak of around USD 187 billion in the last quarter of 2021. To be fair, 2021 was a unique year for various reasons and is not likely to be repeated any time soon.

In fact, the slowdown only became significant in the second half of 2022. The amount raised in the first two quarters of 2022 was in each quarter still higher than the USD 100 billion raised in the last quarter of 2020.

Singapore attracted USD 516 million in startup funding in Q1 of 2023, the highest in the region. Top funding rounds in Singapore included fintech startup Aspire's USD 100 million, and healthtech startup Holmusk, which raised USD 45 million.

Demonstrating the cautious investment climate, Singapore-based Southeast Asian e-commerce and gaming giant, Sea Limited, said by Reuters to be winding down its investment arm, Sea Capital. The move is due to a cooling investment environment globally as macroeconomic and market uncertainty weighs on valuations. The holding company for e-commerce platform Shopee and online gaming developer Garena, is placing less priority on investing given market conditions.

Sea Capital, which was just founded two years back, had made at least three investments, including in 2021, into collapsed cryptocurrency exchange. FTX.Japan's mega startup investment firm Softbank Vision Fund has also been refraining from enhancing its portfolio recently. About a year back, it announced that its Vision Fund will go into "defence" mode and be more disciplined with its investments.

Three weeks back, the Vision Fund reported a JPY 4.3 trillion (USD 32 billion) loss for the fiscal year which ended in March 2023. It posted a loss of JPY 2.55 trillion for the previous financial year. Softbank has led the investment boom in India for years, but it has not made a single fresh investment in the last year.

Based on Reuters sources, it is awaiting a further correction in valuations. It had invested USD 3 billion in Indian companies in 2021 and another USD500 million by April of last year. Overall, startups in India attracted a record USD 30 billion of funding in 2021 and another USD 20 billion in 2022, based on data from CB Insights.

Startups raised a mere USD 2 billion in the first quarter of this year, 75 per cent lower than the same period in 2022. They are projected to raise less than USD 10 billion this year.

Only 217 Indian startups raised funding in Q1-2023 compared with 561 in the same period last year. Investor sources and startup founders expect the funding environment to worsen and many multi-billion-dollar firms to cut valuations within two years. Analysts and industry insiders feel that during the heady days of investment exuberance, valuations have run ahead of reality.

Ankit Nagori, founder of cloud kitchen startup Curefoods was quoted by Reuters as saying, "Indian startups are not catering to a billion consumers. All of them are selling to the same 100 million. The (consumer) market seems 2-3 times inflated." Nagori was Chief Business Officer at Flipkart.

Disclosures from US investment firm Blackrock and Invesco revealed that the former has halved its internal valuations of Indian online education firm Byjus, while Invesco has slashed food delivery firm Swiggy's valuation by a quarter.

The funding squeeze at Indian startups has already led to layoffs and delayed stock listings. It is set to worsen and will likely lead to industry consolidation. "This is a fundamental reset, not just another blip," said V T Bharadwaj, a former managing director of Sequoia Capital India who now leads venture capital firm A91 Partners. "I don't think I'll again see a record fund raise year like 2021 at least for a decade."

Despite the COVID-19 pandemic wreaking havoc on many industries and the global economy, the tech sector emerged as a beneficiary of the circumstances the world found itself in. COVID-19 led to fundamental changes in the way people live and work. "That creates new opportunities for entrepreneurs," said Harvard Business School professor Tom Eisenmann, author of Why Startups Fail. The crisis has also led to many talented, creative people losing their jobs, giving them more free time.

"They'll spend that time cooking up startup ideas," he noted. Many startups took advantage of the fact that COVID-19 accelerated the rollout of digital transformation initiatives, creating a sudden demand for innovative products and services. On top of that, industries and investors gained from a loose monetary policy from central banks around the world and various government-led COVID-19 aid packages which made cheap financing available and encouraged risk-taking.

Tech companies were valued richly and went public at prices that brought in huge profits for their investors. The crypto market was also booming. However, in the second half of 2022, and into 2023, interest rates rose, valuations fell along with the stock markets, and crypto markets collapsed. A looming recession resulted in tech companies laying staff off. All these caused venture capitalists to rein in their investments.