Indian tech startups funding gloomy in Q3, government initiatives signal course correction

The eagerly awaited thaw in the Funding Winter, initially predicted for the later stages of 2023, still lingers, casting a shadow over the vibrant startup ecosystem. Funding Winter, a term that paints the picture of startups facing a chilling reduction in financial backing, made its global debut in 2022. Its echoes are still felt, adding a touch of suspense to the ever-evolving landscape of Indian technology startups.

The third quarter of 2023 does not paint a pretty picture as the Funding Winter's icy grip tightens, resulting in a noticeable slowdown in funding activities. The NASSCOM-Zinnov report, aptly named "Tech Start-ups Quarterly Investment Factbook Q3 CY2023," sheds light on the challenges faced by startups during this period.

However, amidst the hurdles, there's a glimmer of hope and resilience. Government initiatives are signalling a strategic shift, extending support to breathe new life into the tech startup ecosystem.

Funding landscape: A struggle to sustain momentum

The report reveals that funding for tech startups in Q3 CY2023 totalled USD 1.2 billion, reflecting a 20 percent decrease Q-o-Q and a staggering 50% drop Y-o-Y. Comparatively, the Q2 CY2023 figures stood at USD 1.5 billion. The cumulative funding from January to September CY2022 amounted to USD 15.9 billion, contrasting sharply with a modest USD 3.8 billion during the same period in CY2023. Additionally, the number of deals in Q3 CY2023 decreased by 10% Q-o-Q and 40% Y-o-Y.

A uniform decline across all stages

The funding downturn is felt across all start-up stages, with an average drop of over 45% Y-o-Y. Early-stage funding has been particularly affected. Late-stage funding, while not immune, continues to slump, representing only approximately 20% of the total funding witnessed in CY2022 during the first nine months of CY2023.

Mergers and acquisitions: A sharp decline

Mergers and acquisitions (M&A) deals during the first nine months of 2023 experienced a significant decline of 48% compared to the same period in 2022. The number of M&A deals in the first three quarters of 2023 totalled 87, down from 179 in the corresponding period in 2022. Furthermore, there has been a noteworthy Q-o-Q decline of over 25% in ticket sizes across all funding stages in Q3 2023.

Government initiatives: A ray of hope

In response to the challenging funding environment, the Indian government has launched several initiatives during Q3 2023 aimed at bolstering the global growth prospects of the Indian tech start-up ecosystem:

BRICS Start-up Forum: Launched to promote digital transformation through the integration of global industrial and supply chains.

India - Saudi Arabia Start-up Innovation Bridge: A collaborative effort fostering innovation exchange and economic opportunities between the two nations.

Start-up G20 Communique: A forward-looking approach to harmonize the global start-up economy through international collaboration.

Draft DeepTech Policy: Geared towards enhancing the ecosystem through increased research and development (R&D) investment and knowledge commercialization partnerships.

Tax Exemption in Space Tech Sector: A strategic move providing tax exemptions for private sector companies operating in the Space Tech sector, aimed at providing a competitive business advantage.

Unicorn amidst drought: Zepto emerges

In a market grappling with funding challenges, Zepto emerged as the first unicorn of 2023, breaking a drought that persisted for three consecutive quarters. The achievement underscores the resilience and potential of certain players in the Indian tech start-up space.

While the funding scenario for Indian tech start-ups in Q3 CY2023 presents a challenging picture, the proactive steps taken by the government suggest a commitment to rejuvenate the ecosystem. The industry remains cautiously optimistic, recognising that strategic policy measures and innovative solutions are crucial for navigating the current headwinds and steering towards a more robust future.