The “India Venture Capital Report, 2024” report, published by Bain and Company and the Indian Venture Capital Association in collaboration with IVCA, reveals that India’s venture capital landscape experienced significant changes in 2023. The year was marked by a period for moderation and recalibration with a noticeable decline in total investment. Despite this, India retained its position as Asia-Pacific’s second-largest destination of VC and growth financing. Understanding the dynamics that shaped last year and the emerging trend that is likely to influence the Future of Venture Capital in India will be essential as we navigate into 2024. TICE Intelligence Team has a compelling report that will help you understand the Indian VC landscape.

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Startups Face a Perfect Storm: High rates, Inflation and Geopolitics Reduce VC Investments

The global economic environment in 2023 will have a significant impact on Venture Capital Funding. Investor expectations were raised by persistently high interest rates, inflationary pressures and geopolitical uncertainties. This economic backdrop, combined with geopolitical uncertainty and a softening of global consumption, created a difficult environment for startups.

• VC investment in India has dropped by nearly 65 percent, from $25.7 Billion in 2022 to $9.5 Billion in 2023.
• Deal volume and average size both saw a decline. The number of transactions fell by approximately 45% from 1,611 to 880, while the average transaction size dropped by about 30% from $16 to $11 millions.
• The share of seed investments increased from about 60% to 70%. This indicates a shift towards early-stage investment.

Sectoral shifts and emerging themes: Beyond Mainstays: Indian VC Investors Explore New Horizons

Despite the overall decline in investment, certain sectors continue to attract significant funding. Consumer technology, fintech and software & SaaS were the most popular sectors, accounting for almost 60% of all funding. Their relative dominance decreased, however, as investors began to diversify into traditional industries such as BFSI and Healthcare, as well emerging domains like electric mobility and generative artificial intelligence.

• Consumer Technology: Consumer tech investments dropped from $9.5 billion to $2.4billion. While sectors such as edtech and gaming, as well as healthtech, experienced significant declines, D2C (direct to consumer) emerged a bright spot with a deal volume increase of almost 80%. This shift reflects the confidence of investors in India’s consumer story.
• Fintech : Fintech funding has halved from $4.5 billion to $2 billion. Investors were focused on viability, profitability and the top five deals accounted for nearly 70% of all funding. Regulatory changes were a major factor, with policies affecting unsecure lending and enabling advancements in the unified payment interface (UPI).
• Software & SaaS Investments in this sector, excluding generative artificial intelligence, fell by $4.1 billion to $1 billion. Investors were looking for performance evidence, especially when it came to late-stage funding. Vertical software & SaaS, however, showed resilience due to lower competition and higher customer stickiness.
• Emerging Topics: Early signs of product-market match led to a dramatic increase of funding for Generative AI, from 15 million dollars to nearly 250 million dollars. Electric mobility was also a prominent theme, receiving over $0.6 billion of funding. OEMs and mobility service providers received the majority.

Investor Dynamics & Fundraising Trends: PE firms Rise, Crossover Funds Retrench

PE firms doubled their share of investments through participation in large deals, while top VCs shifted focus to smaller deals under $50 million. PE firms doubled the share of their investments by participating in large deals. The top VCs then shifted their focus to smaller deals below $50 million. Crossover funds’ participation decreased by almost 90%. Major players like Tiger Global, Softbank and others significantly slowed their activity.

Family offices continue to provide vital early-stage capital, despite halving deal activity. Corporate venture capitals (CVCs), on the other hand, recorded their lowest level of activity in over five years. In 2023, fundraising slowed down to $4 billion. Domestic VC funds led the charge. They launched a number of thematic funds focusing on emerging themes such as gaming and sustainability.

Exit strategies: Startups find liquidity despite market downturn

Exits soared to $6.6 Billion in 2023, mainly due to strategic exits and sales on the public markets. Non-IPO public trading dominated, which offset a decline in IPOs. Secondary and strategic sales increased as well, with notable exits such as Lenskart’s sale to ADIA or Flipkart’s sale Walmart.

A Look At India’s Startup Future: Focus on Profitability and Innovation

We expect the Indian Startup Ecosystem will continue to show resilience in 2024. Despite challenges like executive departures and market access trimming, startups have demonstrated a commitment towards profitability. We expect key sectors such as B2C commerce, software & SaaS and B2B to rebound due to structural tailwinds. Investors are likely to be interested in emerging themes such as agritech and India-specific AI.

Global investors are optimistic about India’s prospects in the long term, backed by strong macroeconomic fundamentals and fiscal discipline. A robust digital infrastructure also helps. As the market matures, the focus is likely to shift towards sustainable growth, innovation, and positioning India as a major player in the global venture-capital landscape.