Several high-flying Indian startups, including Byju's, Swiggy and PharmEasy, have experienced a dramatic downward adjustment in their valuations

Indian startups experienced a significant contraction in funding in the first half of 2023 as some kingmaker late-stage backers quelled new investments in the South Asian nation amid a slowdown in the broader public market.

The first six months of 2023 saw Indian startups raise a mere $5.46 billion, a substantial 68% decline from the $17.1 billion during the same timeframe in 2022 and a drop from $13.4 billion in H1 2021, as per data from market intelligence agency Tracxn shared with TechCrunch.

This year has thus far failed to yield any fresh unicorns in the Indian startup ecosystem, a stark contrast to the 18 new entrants to the billion-dollar club in H1 2022 and 16 minted during the corresponding period the previous year.

The funding drought is permeating startups across different stages. A total of 325 seed funding deals were struck in H1 2023, a dramatic fall from the 936 in the same period in 2022 and 921 in H1 2021, according to Tracxn’s data.

Other early-stage funding rounds, chiefly Series A and Series B, dwindled to 108, compared to 296 and 211 in the equivalent periods in 2022 and 2021, respectively. Late-stage funding also suffered, slumping to 36 deals from 137 and 114 during similar periods the prior years.

The slowdown comes as many late-stage investors, previously prolific backers of Indian startups, have taken a step back. Tiger Global has done just one deal in India this year, according to Tracxn and Crunchbase, whereas SoftBank (which deployed over $3 billion in India in 2021) and Insight Partners (which backed several late-stage startups last year and in 2021) wrote virtually no checks.

Instead, SoftBank has been bulking up liquidity. For the last several weeks, SoftBank has been selling a portion of its Paytm stake each day, according to a market source familiar with the matter. Chief executive Masayoshi Son said at the company’s annual general meeting last week that SoftBank, which has invested just $650 million through its Vision Funds across the globe in the past two reported quarters, plans to go on the “counteroffensive” soon by resuming AI investments.

Tiger Global, which has deployed over $6.5 billion into Indian startups altogether, is highly unlikely to forge investments in new startups in India for a few more months, a partner at the firm told a founder recently. Scott Shleifer, who oversees startup investments at the New York–headquartered hedge fund, which recently disclosed securing $2 billion for its new fund, said on an investor call earlier this year that returns on capital in India have “historically sucked.”

He said, “If you look at the market-leading internet companies, whether it is Google, Facebook, Alibaba or Tencent, revenue for them got bigger than cost more than a decade ago. You had a great legacy of last 17–18 years of materially profitable internet companies. So returns on equity in the internet got really high and the returns for investors have been really high. But that did not happen in India.”

SoftBank and Tiger Global are investors in 33 of the 65 Indian startups that attained the unicorn status in 2021 and 2022. All put together, India has 102 unicorns.

As some of the prominent late-stage names sit on the sidelines, sovereign funds, especially from the Middle East region, have financed the vast majority of those deals in India in recent quarters.

Rahul Chandra, a seasoned investor and co-founder of Arkam Ventures, said he doesn’t anticipate the return of some prolific late-stage investors to their customary investment activity for at least another two years in India.

The lack of participation from late-stage backers and virtually no IPOs have also hurt the appetite of many midstage investors, who are struggling to devise new underwriting models that reflect the current public market view. Several high-flying Indian startups, including Byju’s, Swiggy and PharmEasy, have experienced a dramatic downward adjustment in their valuations — by a staggering 50% or even more.

Despite this setback, there remains a ray of hope for Indian startups in the form of considerable “dry powder” – untapped capital reserves held by venture capitalists. Almost every active VC firm in India, including the likes of Peak XV Partners, Lightspeed, Accel, Elevation Capital, Matrix Partners India, 3one4 Capital and Blume Ventures, have secured new and larger funds in the past 18 months.

Arkam co-founder Chandra said that it’s likely the pace of investments will pick up in the coming months.

“What we are contained by is mostly locally available capital, which I expect will be behaving in a rational manner because there’s no irrational exuberance coming in to drive valuation up. It’ll still mean that people are chasing each other for termsheets for the good founders because the next two years there will be more capital that will get deployed,” he told TechCrunch in an interview.

Indeed, Peak XV, Lightspeed, and Accel have escalated their deal deliberations and are on track to closing nearly 50 early-stage deals since mid-March, according to people familiar with the matter.