Executive summary

India’s venture capital landscape matured in 2023, as resilience accompanied challenges to shape the investment narrative. The moderation of venture capital (VC) funding in India (from $25.7 billion to $9.6 billion over 2022–23) mirrored global caution on risk capital. But despite the decline in deal flow, India maintained its status as the second-largest destination for VC and growth funding in Asia-Pacific.

A confluence of domestic and global factors extended the funding winter—persistent inflation kept interest rates elevated, while investors considered potential growth headwinds in anticipation of a global GDP softening. These challenges heightened investor expectations and vigilance. Investor confidence was further dampened by softening global consumption and continuing geopolitical uncertainties. This culminated in a decline in deal volume (from 1,611 to 880 deals) and average deal size (from $16 million to $11 million).

Upon closer examination of the deal flow, several shifts observed in 2022 continued through 2023. Mega-rounds plummeted by almost 70%, from 48 to 15. Several scaled start-ups chose to defer fund-raising since the advent of the funding winter–this drove consecutive and substantial declines in the emergence of unicorns, reaching pre-2019 levels. In contrast, small and medium deals (less than $50 million) witnessed milder compression, declining by about 45% from 1,501 to 852. This resilience signaled investor optimism for India’s medium-to-long-term prospects.

Amidst these shifts, tech-first sectors (consumer tech, fintech, and software & software-as-a-service [SaaS]) remained dominant in 2023 and attracted nearly 60% of funding. Their salience, however, reduced from 2022 as investors shifted focus to traditional sectors with strong fundamental tailwinds (e.g., banking, financial services, and insurance [BFSI], healthcare) and emergent themes like electric mobility and generative artificial intelligence (AI).

Looking closer, funding declined across sectors, while notable green shoots remained resilient. For instance, while consumer tech funding contracted significantly (0.3x of 2022 value), deal volumes in the direct-to-consumer (D2C) offline/online subsector grew ~80%, as investors held confidence in India’s consumption story. Amidst a broader decline in software & SaaS, generative AI emerged as a breakout theme, with investments soaring to ~$250 million in 2023 from a nascent base in 2022.

Several noteworthy investor trends unfolded in 2023 in both deployment and fund-raising. There was a democratization in 2023, as private equity (PE) and growth equity firms doubled their share in deployment to pull even with leading VC firms. This democratization was driven by PE and growth equity firms selectively participating in large growth deals, while top VCs shifted focus to smaller ticket rounds.

Crossover funds trimmed funding activity and reduced deal volume by approximately 90%. Family offices remained salient, despite halving deal activity, and continued to provide crucial early-stage capital. While fund-raising slowed to $4 billion, domestic VCs became significantly more salient, driving more than 90% of the raises and launching several thematic funds focused on emergent themes.

It was a year of heightened exit activity, as investors sought to provide liquidity to their LPs in a high-interest-rate environment. Exits surged by almost 1.7x to reach $6.6 billion in 2023—crossover funds led the pack and comprised close to 65% of total exit value. Non-IPO public market sales were the majority exit route, as crossover investors trimmed their positions in their publicly listed portfolio companies (e.g., Paytm, Zomato). Secondary and strategic sales also increased in value, primarily driven by mega-exits in consumer tech (e.g., Flipkart, Lenskart).

Emerging from a challenging 2023, the maturity of the Indian VC landscape underwent a visible shift, fostering optimism for 2024 and beyond. Investors adapted to the “new normal” by adjusting investment strategies and tightening governance guardrails. Start-ups focused on enhancing profitability and drove noteworthy deep-tech innovation. Erstwhile dominant themes with structural tailwinds are set to rebound, such as business-to-consumer (B2C) commerce and software & SaaS, while several emergent themes are poised to surge, such as energy transition, sustainability-centric agritech, and India-nuanced AI tooling. Over a longer horizon, India’s robust fundamentals—underscored by its significant consumption headroom, demonstrated fiscal and monetary discipline, geopolitical positioning, and expanding digital backbone—will continue to fuel optimism among investors.

About IVCA

The Indian Venture and Alternate Capital Association (IVCA), founded in 1993, is a not-for-profit, apex industry body promoting the alternate capital industry and fostering a vibrant investing environment in India. IVCA is committed to supporting the ecosystem by championing regulatory interventions; facilitating advocacy discussions with the Government of India, policymakers, and regulators, resulting in the rise of entrepreneurial activity, innovation, and job creation; and contributing towards the development of India as a leading fund management hub. IVCA represents 430+ funds with a combined India AUM of over US$ 350 billion. Our members are the most active domestic and global VCs, PEs, infrastructure, real estate, and credit funds, limited partners, investment companies, family offices, corporate VCs, hedge funds, and knowledge partners.