Funding Winter and its Impact on Indian Startups

Why in News

According to recent economic data, Indian startups have been going through a funding winter in the last five years, which has led to a 55% drop in the number of unicorn startups in India.

About Funding Winter

• Funding winter refers to a prolonged period during which there is a significant drop in the flow of venture capital into startups.
• In general terms, a prolonged period of low capital inflows into startups and a period of financial uncertainty is called funding winter.

Key factors responsible for Funding Winter

• Global economic slowdown: Rising interest rates and a slowdown in the global economy weakened investor sentiment.
• Greater focus on profitability: Investors became more cautious and preferred profitability over high growth.
• Overvalued Startups: The funding boom raised concerns about some startups being overvalued.
• Rising Interest Rates: Central banks around the world, including the US Federal Reserve and RBI, raised interest rates to combat inflation. This increased the cost of debt, reducing the amount of capital available for venture capital firms to invest in startups.
• However, the recent interest rate cuts by the US Fed Reserve are likely to have a positive impact on this.
• Geopolitical Uncertainty: Global events such as the Russia-Ukraine and Israel-Hamas conflicts have created volatility and uncertainty in financial markets, prompting investors to adopt a more risk-averse approach.
• Performance of Existing Startups: The success (or failure) of startups funded during the boom is impacting investor confidence in the Indian startup ecosystem.

Impact of Funding Winter on Indian Startups:

• Funding winters are cyclical and temporary, but they can pose significant challenges for early-stage companies or startups due to a lack of capital.
• Indian startups raised $38 billion in funding in 2021, the highest ever recorded.
• This then led to a shift in funding for Indian startups and the funding winter began.
• By December 2023, Indian startups experienced a significant drop in funding by over 33% compared to 2021 and 2023 and raised only $11.3 billion in 2023. This is the lowest funding amount in the last five years.