MUMBAI -As investors adjust to stretched valuations and failing consumption growth, a funding crunch at Indian startups that has already resulted in layoffs and postponed stock listings is expected to pave the way for industry consolidation.

According to data from analytics firm CB Insights, startups in India raised just $2 billion in the first quarter of 2023, which is the lowest quarterly amount in almost three years and 75% lower than the same period last year.

Startups may only raise less than $10 billion this year if things continue this way, a far cry from the record $30 billion they raised in 2021 and $20 billion in 2022.

Startups are negatively impacted by the slowdown, as is Prime Minister Narendra Modi, who has praised their success and referred to them as the "backbone of new India." It might harm India's job market and economic expansion.

"This is a fundamental reset, not just another blip," declared V.T. Bharadwaj, the current managing partner of venture capital company A91 Partners and a former managing director of Sequoia Capital India. For at least a decade, "I don't think I'll again see a record fundraising year like 2021."

With investors like Sequoia and Tiger Global placing large bets on companies that burned capital to entice customers in the 1.4 billion-person nation, many firms were able to reach multi-billion dollar valuations in recent years thanks to the possibility of rapidly expanding consumption both offline and in India's digital environment.

The investment climate in India and elsewhere has been impacted by global variables including high rates and inflation; startup funding in the United States declined by around half to $32.5 billion in the first quarter, while it plunged by 60% to $5.6 billion in China.

But India's startups, which depend on foreign investment considerably more than their international counterparts, have experienced a more severe cash crunch, which some executives claim is also partially the result of investors realizing that they underestimated the rate of demand growth.

In an April report, the Indian venture capital firm Blume Ventures said that consumption outside of the top 30 million Indian homes had dramatically decreased and was being driven by a "tiny superuser set."


Although India has a population of over one billion people, only 260 million people utilize the government-backed digital money transfer service UPI and the meal delivery startup Zomato has only 50 million annual transacting users.

Startups in India aren't serving a billion customers. The same 100 million people are buying from all of them. Ankit Nagori, a former top executive of Walmart's e-commerce subsidiary Flipkart and the current CEO of cloud kitchen company Curefoods, claimed that the (consumer) market appears to be 2-3 times exaggerated.

After the loss-making digital payments company Paytm (PAYT.NS) failed to list in 2021, investors and regulators began to wonder if startup valuations were reasonable, which led to the first indications of unhappiness in the Indian market.

Things have become worse since then.

According to six investor sources and three company founders who spoke with Reuters, the funding environment will deteriorate over the next two years, and many multibillion-dollar companies will lower their values.

BlackRock recently reduced the value of the Indian online education company Byju's that it invested in by half, to $11.15 billion from $22 billion, while Invesco decreased the value of food delivery company Swiggy by a quarter, to $8 billion, according to disclosures from the U.S. investors.

Additionally, CB Insights reports that only 271 Indian companies raised funding in Q1 2023 as opposed to 561 in Q1 2022.

According to two people familiar with its intentions, Japan's SoftBank, which for years had been at the forefront of the funding boom in India, has made no fresh investments there in the past 12 months while it waits for additional value corrections.

In the midst of all the suffering, banker Shivakumar Ramaswami has seen an opportunity and is establishing a new M&A desk at his tech-focused investment banking firm Indigoedge. Two of his colleagues are only charged with scouting for M&A prospects.

"So many sponsored firms reached a certain scale before stalling. Everyone needs a place to call home, and many of these businesses are unable to pursue an IPO. We are getting ready to collaborate with them," he stated.