?? The year of venture chill

December is always a good time to review the state of startup funding, reflecting on the year through data rather than anecdotes.

Research platform Tracxn has come out with an annual report card, and three data points in it present a worrying picture.

• The number of startup investments, which consistently surpassed 2,000 beginning in 2015, now stands at just 1,000.
• The number of “deadpool startups” has nearly doubled from 18,148 in the 2022 report to 34,848. The term refers to tech businesses that have shut down or are on the brink.
• An amount of $957 million has been deployed so far in the current quarter, October-December. No mega rounds are anticipated in the upcoming weeks. So, we may well see the lowest funding activity in a three-month period since the third quarter of 2016, when the Indian tech ecosystem was reeling from a similar winter.

A yearly comparison reveals a marked decline in total funding — from a high of $42 billion in 2021 to $25 billion in 2022 and $7-8 billion in 2023. Fewer cheques are being signed even though India-dedicated VC houses raised $8.5 billion for future bets in 2022, their highest-ever annual haul.

?What are the factors that have set the numbers back by a decade? Let me break it down, based on The Arc’s conversations with dozens of investors across stages.

Early-stage deals aren’t happening at the same rate as before because new startup births have fallen. In 2021, a torrent of venture capital had encouraged several executives at tech companies to turn into first-time founders. The downturn that followed forced those considering taking a similar plunge to stick to their regular employment.

The number of $100-million-plus deals for companies in the mid-to-late phases has dropped from a peak of 103 in 2021 to just 17. Tech financiers like Tiger Global, SoftBank and Prosus, which tend to back these companies, are facing internal challenges, as we wrote last week.

There are also practical reasons behind the dull pace of investments.

• Many startups close to a $1-billion valuation and even unicorns have not identified a product-market fit.
• Those who have succeeded on this front and controlled their cash burn rate are delaying seeking a fresh round over concerns that their valuation expectations won’t be met.
• Certain companies still have cash from their rounds in 2021.
• There is a greater VC emphasis on due diligence after corporate governance issues surfaced at Byju’s, BharatPe, GoMechanic and Zilingo, among others.

The funding scene may remain bleak in the first half of 2024. The Indian startup ecosystem has made it through such conditions before. In early 2017, the then poster child Flipkart underwent a down round at a $10-billion valuation in what was perceived as a major market reset. A year later, Walmart acquired Flipkart at a 2X higher valuation.?

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Paytm to scale back BNPL as lenders turn watchful

Arc Notes

• Fintech unicorn Paytm is downscaling its pay-later service, Paytm Postpaid, by removing a segment of users over eligibility rules and decreasing loan limits for many others. The service, which allows primarily shoppers to make purchases using credit, had nearly 13 million users as of September 2023.?
• The trigger: Banks and NBFCs working with fintechs have begun exercising caution, including reviewing terms and seeking financial protection against potential loan defaults from the digital players. This is a reaction to the RBI’s move to raise “risk weights” for unsecured personal lending by 25%.
• Paytm’s shares closed at Rs 661.3 on Thursday, December 7, falling 19% and erasing Rs 9,642 crore ($1.15 billion) from the market cap of the fintech. The market cap now hovers at $5 billion.

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