Executive summary

2022 signalled a recalibration for venture capital (VC) investments globally after a record capital influx over the last few years. Increasing macroeconomic uncertainty and recessionary fears drove caution in investing momentum globally, headlined by a few key triggers: (a) post-pandemic tightening of monetary policy as central banks pulled the plug on access to cheap capital (more than 2.5 percentage points [pps] interest rate hikes across the US, UK, and Europe during 2022); (b) intensifying geopolitical tensions (e.g., Russia-Ukraine conflict, US-China decoupling); (c) trade sanctions by US and Europe, leading to global supply chain shocks; and (d) surfacing of irregularities in corporate governance across the tech ecosystem globally.

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Funding momentum in India similarly softened in line with the global slowdown as total deal value saw a compression from $38.5 billion to $25.7 billion from 2021 to 2022. However, India continued to demonstrate resilience to global headwinds as structural enablers drove a positive economic outlook (i.e., large consumption potential, inclusive growth led by scale digital adoption of the decentralised “India Stack,” effective fiscal and monetary policy discipline limiting inflationary growth, and tailwinds from economic activity shifting away from China). Deeper analysis of the underlying metrics, as indicated below, reflects a more nuanced picture:

Decline in funding mostly took place over the second half of 2022 as global macro headwinds intensified over the year—in fact, investments grew 1.4x over the first half of 2021–2022 but saw a 70% decline in the second half of 2022 compared to the second half of 2021. Within Asia-Pacific, the share of India-focused VC investments reached 20% for the first time, and India continued to account for ~5% of global VC funding in line with 2021. For the second time in a row, the number of unicorns added in India (23) outpaced China (11), and India marked the addition of its 100th unicorn (Open Technologies) in May 2022.

"While macroeconomic factors drove the slowdown in funding globally, India continues to be attractive for investors globally given strong fundamentals. Low leverage, tech adoption, and favorable demographics create a long runway for growth. We see limited impact, especially in early-stage rounds, and continue to invest across sectors.”

 

Despite the drop in Indian VC funding to $25.7 billion (0.7x of 2021 funding), deal volume saw marginal 1.1x growth, reaching 1,611 deals led by an expansion in seed to series B deals. Further, series A deals maintained an average deal size of ~$11 million, cementing a step shift in early-stage dealmaking in India (average series A deals hit the coveted $10 million mark for the first time in 2021). The decline was driven primarily by average deal size compression from $25 million to $16 million over 2021–2022. A significant drop in $100 million+ “megarounds” (from 92 to 48 over 2021–2022) was a key factor in deal size compression, with global investors exercising caution on large-ticket size deals. Further, venture funding continued to see democratisation, with emerging hubs beyond Bengaluru, Mumbai, and the NCR (National Capital Region) receiving ~18% of the funding and accounting for 9 of 23 unicorns added in 2022.

“Through our investments in Citymall and Apnamart, we have seen disruption in large $100B categories in Tier 2+. The urban-rural digital divide will continue to converge, creating opportunities for start-ups. We are bullish on the potential of “Bharat”, or Tier 2+ India, and the next decade of start-ups serving its needs efficiently and profitably.”

Software-as-a-service (SaaS) and fintech continued to see momentum relative to 2021, growing in salience from ~25% to ~35% of total funding in 2022. Consumer tech, however, saw a 55% drop, from more than $20 billion in 2021 to less than $10 billion in 2022. Several investment themes emerged in 2022:

• Moderation in consumer tech deal momentum was reflected across segments such as edtech, online food delivery, B2C commerce, and D2C brands. Given typically higher cash-burn business models in consumer tech, investors remained cautious about large deals in 2022.
• In contrast, SaaS saw steady deal momentum over an expansive base from 2021, led by increasing asset depth, proven revenue growth, EBITDA-positive business models, and an emerging base of second-generation founders focused on building category-defining solutions.
• Despite regulatory headwinds and global compression in fintech funding, Indian fintech sustained momentum—driven by several scale deals focused on lending and fintech infra players (four unicorns) in the first half of 2022. The second half of 2022 saw consistent deal volume via early-stage deals across emerging segments—insurtech, embedded lending, and wealthtech.
• Finally, green shoots were visible across emergent sectors: electric vehicle (EV), agritech, and deep tech (space tech, generative AI and climate/clean tech) saw significant interest.

The investor base consequently saw a few critical shifts over 2022. Concentration of investments by large investors decreased to less than 20% from ~25% in 2021 as investment activity by global hedge funds and crossover funds slowed down. While most leading VCs saw a compression in the deal activity, salience of early-stage investments by these funds within respective portfolios increased (e.g., more than 80% of deals for top funds, including Sequoia, Accel, and Lightspeed, were early-stage in 2022). Private equity (PE) firms continued to demonstrate interest in select growth equity deals—marquee deals include Dailyhunt (CPPIB), ElasticRun (Goldman Sachs), and Amagi (General Atlantic). In an increasing validation of the maturity of the Indian start-up ecosystem, micro VCs grew in presence: the base of active micro VC funds grew to more than 80; several launched larger funds (e.g., the $55 million Artha Select Fund, maiden micro VC fund by Artha Capital, and the $25 million Auxano Fund); and thematic micro VCs also increased in presence (e.g., SaaS [Pentathlon] and gaming [Lumikai]). Lastly, family offices, corporate VCs, and first-time funds remained active over 2022, participating in more than 300 deals, in line with 2021.

“Micro VCs fill a critical gap between the slightly unorganised angel ecosystem and the early-stage VC market. They are small, nimble, and focused teams that help many more founders get their nascent ventures off the ground before they are ready for a full seed round. Early-stage VCs, such as us, love collaborating with micro VCs."

Further, despite the caution in capital deployment, 2022 saw record fund-raising and, in many cases, investors raised their largest ever India-focused funds. Several Tier 1 investors raised new India-focused funds (e.g., Sequoia’s $2 billion India Fund VIII and Lightspeed India’s $500 million India/Southeast Asia-dedicated fund). Similarly, prominent domestic VCs and smaller funds saw significant fund-raising over 2022 (e.g., Fireside Ventures Fund III—$225 million; Blume Ventures Fund IV—$250 million; and Artha Select—$55 million micro VC fund). Despite dry powder build-up, capital deployment will likely remain cautious as general partners (GPs) scout for quality assets and, in a few cases, await correction in valuation expectations while limited partners (LPs) also remain cautious about commitments as realisations from prior deployments may have slowed down.

A dramatic decline in exits with VC participation was witnessed in 2022, relative to 2021, declining from $14 billion (including the now-cancelled BillDesk exit) to less than $4 billion in total exit value. Secondary transactions accounted for a material share of exits (47%), but overall value dropped as large anchor exit deals declined (only 11 secondary exits greater than $50 million in 2022 compared to 19 in 2021). While the share of public market exits also remained salient (40%), the mix shifted from initial public offering (IPO)-driven exits to trades—specifically exits by anchor VC funds as lock-ins on tech IPOs expired. At least six IPOs saw VC exits in 2022, including Five Star Business Finance (Sequoia, Matrix), Delhivery (SoftBank), Tracxn (Sequoia, Accel, Elevation), but total IPO-driven exit value remained muted relative to 2021. Further, with 2022 witnessing a global tech stock rout, several tech-first players deferred potential IPO plans, affecting overall exit value. The broader start-up ecosystem in India witnessed several fundamental shifts in 2022 that are likely to have a bearing on the landscape in the near to medium term:

• Investors: Investors pivoted from “growth at all costs” to “sustainable unit economics”; most raised large funds, leading to a dry powder build-up; and leveraging of venture debt as an alternative funding option became viable.
• Regulators: Tightening regulatory guidelines affected fintech (ban on prepaid instrument [PPI]-based credit and new digital lending norms) and cryptocurrency (tax on virtual digital assets [VDA]) the most, but macro regulations broadly continued to act as enablers in the ecosystem—through production-linked incentives (PLI), a framework on tech listings by Securities and Exchange Board of India (SEBI), and an ongoing focus on building public digital rails (e.g., Open Network for Digital Commerce [ONDC] launch).
• Start-ups: 2022 was a turbulent year for start-ups, with more than 20,000 layoffs, several distress mergers and acquisitions (M&A), corporate governance issues, and more than 10 deferred IPOs, but a few bright spots remained, including the growing salience of new emerging hubs and increased diversity in leadership positions within start-ups.

“For the start-up ecosystem, 2022 will be remembered as the year when quality of business became imperative and the growth-at-all-costs mantra went out of fashion quickly. At the early stage, the definitions of PMF became stricter; for larger companies, generating profits became a priority. We believe this is healthy for the ecosystem and will ultimately lead to the creation of robust businesses that can stand the test of time. We continue to believe that there are secular tailwinds across the ecosystem (e.g., low data costs, digital infra as public goods, aspirational consumers, a more formal economy, world-class software companies, dry powder) that make this an excellent time to start a business in India.”

Cautious optimism across stakeholders may be seen in 2023: While global macro headwinds are likely to continue to affect India, shifts across the ecosystem indicate that a more resilient ecosystem will emerge. Investors are expected to double down on early-stage dealmaking and innovation in emergent spaces such as gaming (hyper-casual games, e-sports), healthtech, and EV, and AI-led use cases are likely to see interest. SaaS and fintech will remain significant—while regulatory oversight may have some effect on fintech, focus on globalisation of the India Stack (e.g., cross-border Unified Payments Interface [UPI], identity, cross-border commerce) is likely to open up new avenues. Participation from a wider investor base (e.g., micro VCs, family offices, global funds foraying into India) is likely to sustain. Scale start-ups will remain laser-focused on unit economics. Some M&A-driven consolidation and potentially flat or down rounds may be in the offing as investors revaluate assets in their portfolios.

In the longer term, global investors are likely to remain positive about the India Story—solid macro-fundamentals, a large consumption opportunity, a sizeable workforce entering the formal economy, a digitally enabled population, and a deepening innovation ecosystem will remain key foundational drivers underlying India’s promise in the next decade.

“India is one of the most dynamic markets in the world for early-stage investments. India has a strong economy which will continue to expand. Even if the quantum of deals is not as high as in previous years, the best quality founders continue to raise funds. We believe this is a great time to do business with such founders.”

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• Acknowledgments

  The authors deeply thank the Bain India team, including Apurva Shah, Tanvee Mall, Shubham Khemka, Shubham Gupta, Anshika Chaudhary, and the Bain Capability Network team for their in-depth research and analytical rigour. We also wish to thank Shelza Khan and Kelly Rickard for their editorial support.

About IVCA

The Indian Venture and Alternate Capital Association (IVCA) is a not-for-profit apex industry body that promotes the alternate capital industry and fosters a vibrant investment ecosystem in India. IVCA is committed to supporting the ecosystem by facilitating advocacy discussions with the Government of India, policymakers, and regulators, thereby contributing to the growth of entrepreneurial activity, innovation, and job creation in the country, and supporting the development of India as a leading fund management hub. IVCA represents 490+ funds with a combined AUM of over $350 billion. Our members include some of the most active domestic and global venture capital and private equity funds, as well as funds focused on infrastructure, real estate, and credit. The association also includes limited partners, investment companies, family offices, corporate venture capital investors, and knowledge partners. These funds invest across a wide spectrum of strategies, including early-stage and emerging companies, venture growth, buyouts, special situations, distressed assets, credit, and venture debt, among others.