Big Cheques Are Back, So Are Unicorns But Caution Rules VC Funding Ecosystem

Yet, the overall sentiment in the venture capitalist ecosystem is that of caution and wariness, as startup funding winter continues to freeze large-scale revival in deals. In spite of a spike in the number of ‘big deals’, deal volume has remained muted in the first half of 2024. 

As per GlobalData, the total value of VC funding in India between January and July stood at $6.3 billion across 672 deals. While the value of deals zoomed by 42%, the deal volume went up by a mere 1.2%. The deal value was boosted by large cheques like Zepto’s $665 million deal, Meesho’s $275 million, PharmEasy’s $216 million fundraising and a few more. 

“The massive jump in funding value, despite a modest 1.2% growth in deal volume, can be attributed to some of the big-ticket deals announced during the review period. This also proves that even though VC investors remain cautious, there is no dearth of money for promising startups,” said Aurojyoti Bose, lead analyst at GlobalData. 

The blaring gap between deal value and deal volume is also due to a slump in the early and stage investments. That’s where a lot of small cheques are written across a large number of startups. Early and seed stage investments saw their biggest slump in 2024, after a spectacular growth in the last three years. Between 2021 to 2023, early-stage deals made up a significant portion of deal volume. 

As per a Tracxn report, seed-stage funding fell 17.3% to $455 million in H1 2024 as compared to H1 2023, and early stage funding fell by 28%. 

“In 2024 so far, both the volume and value of early-stage deals have dropped due to both—investor caution, amid broader macro-economic challenges and liquidity concerns amid over-valued and tight profitability situations. This has made investors more risk-averse,” said Praneet Singhal, director at 1Lattice, a market research company. 

The euphoria around startup investing calmed after the funding winter set in the second half of 2022. As caution set in, most VCs have changed the way they look at a deal. 

“The time taken to do a deal has gone up, due diligence is more thorough. They now look for profitable growth, path to profitability and strong business models as opposed to Gross Merchandise Value led growth or businesses with a lot of burn,” said Ratna Mehta, managing partner and chief executive officer of Fundalogical Ventures. 

Now that VCs chase high-quality businesses, fewer early-stage startups are making the cut. 

New companies too are being looked at with a very close lens. According to data by Tracxn, the number of companies that received funds for the first time fell to 168 in the first half of 2024, almost halving from 324 in H1 of 2023. 

Also, the choice of sectors that VCs want to invest in, is also rapidly changing. From only tech-driven businesses, which were the flavour of the season during the pandemic, VCs are now shifting gears to slightly more traditional and robust businesses. 

“It is our view that VCs are now looking at D2C brands with hybrid models. Within logistics and supply chain, we prefer business models which are leveraging tech to enhance fulfilment and not only tech platforms. Also, there is a lot of caution towards SaaS companies due to high peak valuations. In SaaS, they are also wary of the total addressable market for those which concentrate only on India,” said Mehta. 

Officially, the startup funding winter is now two years old—as it had set in the second half of 2022. While investments are no more frozen like they were a couple of years back, the winter is nowhere near its end. 

Neha Singh, co-founder, Tracxn says that startup funding is seeing signs of stabilisation and going upward. The funding situation can only be described as a thaw of the long winter. 

“The funding winter is showing signs of easing, but it's not over yet. One clear indicator that the funding winter is still in effect is the notable increase in debt deals throughout 2024. Companies have been relying more on debt financing, as equity funding remains difficult to secure at favourable valuations,” Singhal said.

Venture debt saw a massive growth in the last few years. The overall funding across buyouts, investments (late, growth, PIPE, early) and debt as of August 2024 stands at $57.1 billion, as per 1Lattice. But 587 deals out of 1,183 deals clinched this year are debt deals amounting to $36.85 billion— that’s around 10 times the debt deals seen in 2021, which were at $3.58 billion across 177 deals. 

The very fact that more companies are choosing to go the debt route to raise funds itself shows that not all is well with fundraising. “The funding winter could be considered over when we see a significant rebound in equity financing activity and a reduction in the reliance on debt deals,” Singhal explained.

Venture debt, as per Mehta, opened up when promoters wanted to go for an intermediate funding before raising equity to improve run rate and get a better valuation. “Venture Debt funding will become slower when equity funding slows as they’re piggy backing on equity investors,” she opines. 

There are many challenges for equity funding to unfreeze to levels at where they were before the post-pandemic euphoria set in. Global economic environment, interest rates, geopolitical tensions could affect investor sentiment, even as robust fund closures and emerging business models like AI and climate tech offer hope. 

Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.