Is the 2022 Contraction in VC Funding Undermines Opportunities?

The year 2022 was not as enthusiastic as the previous year due to a contraction in Venture Capital (VC) funding. But, going by trends, the year finished happily on some important parameters. While startup values contracted from their lofty highs in 2021, the ecosystem has received less pre-seed funding this year (2022) than in 2021, and it hasn't been particularly disappointing either. According to EY data, investments in startups were a little over $37 billion in 2018, roughly $46.5 billion in 2019, and around $47.5 billion in 2020. Still, they increased to $77 billion in 2021 as 44 unicorns—startups valued at at least $1 billion—rose to prominence.

Chill out during the 'Funding Winter'

(In private enterprises, venture investors slowed down their investment rate in the second half of 2022, indicating a slower funding environment as 2023 gets underway)

Twenty firms have now joined the exclusive $1 billion club despite 2022 getting off to a slow start, and according to Vivek Soni, partner for private equity services at EY India, it is likely to end with investments in private equity (PE) and venture capital (VC) totalling $53 billion to $55 billion. The deal value decline was mainly caused by several tech-focused funds pausing new investments, such as Tiger Global and Softbank Group. In contrast, several crossover funds withdrew owing to the global tech crash. Yet, most investors claimed that despite the worldwide liquidity crisis, India has emerged as a bright spot for international investors looking to deploy money thanks to growing interest rates and policy-related risks associated with China. India has distinguished itself from other emerging economies by its sustained expansion, supported by strong domestic demand. Companies with solid management teams, strong balance sheets, and compelling offers, as well as those that are currently successful or showed a demonstrable path to profitability, will be attractive to pre-seed investors in India, notwithstanding the recent reduction in funding for startups. According to Temasek Holdings' head Ravi Lambah, businesses with solid foundations anticipate a rise in startup funding.

This means "improving access to financial markets for development and expansion by raising revenues and managing costs to support operations with their cash flow." The amount of dry powder ready to be deployed is the other factor contributing to expectations for a better funding climate in India the following year. There is a sizable pool of capital accessible for Indian enterprises because numerous domestic and international investors raised funds with a focus on Southeast Asia or local markets in 2021 and early 2022. Blume Ventures closed its $250 million largest India-specific fund earlier this month. Sequoia Capital launched a $2.85 billion fund for India and Southeast Asia for 2022. This year, funds were also raised by other VCs, including Lightspeed Venture Partners, Accel Partners, and Elevation Capital. Private equity firms with sizable global and regional funds, like KKR, Blackstone, Carlyle, Advent International, and Apollo Global, have recently boosted their investments in India. In 2020–2021, "cheap finance" was in short supply, according to Lightspeed India partner Vaibhav Agarwal. India is, nevertheless, in a prime position to experience an "innovation frenzy." This is because China-plus-1 manufacturing and supply chain development is underway, artificial intelligence is at an inflexion point, web3 has lost trust, and public businesses like Meta and Netflix are under tremendous pressure to alter consumer behaviour.

Early Stage Startups: The Gainers

(Despite the contraction in funding, 2022 emerged as the year that received the most seed funding from 2019 to 2022)

China and Europe are dealing with global concerns while the startup ecosystem in the US has developed. Due to this, angel investors from these nations now view India's startup environment as the future centre of innovation and expansion. India has seen some macroeconomic stability, albeit not total isolation, which has further intensified growth across sectors in the startup environment. Despite the decline in funding, 2022 emerged as the year that received the most seed funding from 2019 to 2022. A significant increase in deal sizes and the volume of closed deals in 2022 contributed to the early-stage startup ecosystem's sustained dynamism. Today, investing in early-stage companies is a safer option because most late-stage and growth-stage firms are losing money and showing no signs of turning a profit. Entrackr estimates that in H1 2022, 596 early-stage firms raised money instead of 226 deals at the late/growth stage.

According to experts, well-organised rules have contributed to a greater level of trust among foreign investors in India. The FEMA (Foreign Exchange Management Act), the FDI policy, the RBI's regulations, and even taxes laws for investors are among the primary rules. In 2016, the Reserve Bank of India approved a change that permits FVCI to make investments without obtaining RBI consent in ten sectors (including infrastructure, IT, the dairy and poultry industries, biotechnology, and IT). These sectors include infrastructure, ICT, the dairy and poultry industries, and biotechnology. Furthermore, regardless of the sector in which an Indian startup operates, FVCI will not require RBI permission to invest in stocks, equity-linked instruments, or debt securities issued by such startups.

Opportunities despite Challenges

(Capital poured into fast-growing businesses, and digital companies went public at lofty valuations)

Even if venture funding declines in 2022 due to impending economic uncertainty, global venture capital firm 500 Global is optimistic about the VC industry. This year's allocation to ventures has undoubtedly decreased, but how much of a decrease depends on the markets and opportunities you choose to participate in. Global venture capital in 2022 totalled $445 billion, down 35% from the year before, according to figures published by Crunchbase. The company oversees assets worth more than $2.7 billion. They invested early in several firms, including the Southeast Asian ride-hailing company Grab, the Australian graphic design software Canva, and the Indonesian fish farming tech venture eFishery. Startups have been compelled to refocus on profitability and become more cost-effective due to global economic headwinds impeding growth. Especially in Southeast Asia, there is currently an unheard-of $15 billion in "dry powder" for venture pre-seed funding. Is that money sufficient to get businesses through whatever they face today for the next two to three years? This is the question investors ask themselves. What opportunities might arise in the circumstances like this? There may be less capital coming from non-institutional investors who aren't accustomed to investing in ventures.

In 2022, about 1,400 different businesses got investment, an increase of 18% over 2021. According to the research, 47% of these firms raised their first round in 2022. Early-stage investments increased by 25–35% over 2021 ($5.9 billion in CY2022) and seed-stage investments ($1.2 billion). Almost 1,018 investments were made in seed-stage IT startups in 2022. Due to the significant correction in the global public markets, late-stage investments took the worst hit, with a loss of 41% in deal sizes higher than $100 million. The ecosystem's maturity, where creators purposefully prioritise profitability overvaluation and investor faith despite the influence of macroeconomic factors, is extraordinary. Industry leaders observed that this will open the door for growth in 2023 and beyond. Deep tech adoption and innovation are projected to gain prominence among tech companies, particularly in SDG-related fields that call for sophisticated solutions.

JC Team Capital - Jani Venture is a capital fund firm in Canada investing into the early- stage startups to get their business to take off. We provide a platform to connect startups to angel investors for seed funding.