The tide of startup-funding is turning in India, with a rising trend of overall funding while the deal sizes grow bigger.
However, the spotlight now is on late-stage startups, many of which are seen to be headed for initial public offerings (IPOs).
Record surge in stock markets and consistently improving performances of listed startups are understood to have turned the sentiment for the better, especially for those that exhibit a clear path to an IPO.
The number of startup IPOs rose to 17 so far this year, from six in the first half of 2023 and 12 in the second half.
In parallel, startup funding rose to $4.1 billion so far this year, up from $3.96 billion in H2 2023, confirming a trend of revival.
Funding for late-stage startups, which include the IPO-bound group, was $2.4 billion so far this year across 50 deals, compared to $2.3 billion through 61 deals in the second half of last year and $2.4 billion in January-June 2003, showing a rise in the size of each deal.
Zepto, which announced a funding round of $665 million and a more-than-doubling of its valuation last week, credited the feat to its improved performance and also spoke of a likely IPO next year.
“Having this cash in the bank enables us to launch an IPO of meaningful scale.
"We are quite confident the IPO will happen in 2025,” Aadit Palicha, co-founder and CEO of Zepto, told Business Standard while discussing the funding.
Last month, Flipkart announced raising $950 million from its parent Walmart, and from Google.
Flipkart, too, is seen to be on the IPO path, though it might take longer to get there than Zepto.
“The path towards listing is now better understood and the benchmarks are also well captured.
"Founders are preparing for liquidity events two to four years in advance to ensure their internal systems, data architecture, as well as compliance are in place, apart from strong operating performance,” said Vinod Murali, co-founder and managing partner of Alteria Capital, a venture debt fund.
Alteria Capital has invested in IPO-bound startups such as Zepto, Infra.market, Rebel Foods, and Ather.
“A diverse group of investors is keen to back startups that exhibit a clear path to an IPO.
"This is why companies like Zepto, PhonePe and Flipkart have been able to raise substantial late-stage rounds,” said Anirudh A Damani, managing director of Artha Venture Fund.
Early-stage startups are, however, likely to face challenges while raising capital. Funding among these companies remained sequentially flat at $1.3 billion in H1 2024, but was 28 per cent lower than H1 2023.
“There is a noticeable liquidity crunch, and early-stage startups struggle to attract capital.
"This is partly due to the attractiveness of the IPO and SME IPO markets, which have performed exceptionally well.
"Investors find more compelling opportunities with better risk-adjusted returns in these markets than early-stage startups,” added Damani.
Companies, irrespective of scale, have now started to modify their objectives to focus on steady growth with strong unit economics, resulting in brighter prospects to raise capital.
“Better companies have now reoriented themselves to current realities — managed and calibrated growth, focus on profitability, and ability to build metrics that can help them in IPO.
"All of this has meant that more and more funds are opening up their purse strings,” said Prashanth Prakash, partner, Accel.
Large amounts of unallocated capital currently available for deployment also bodes well for the country’s startups.
India-focused venture capitalists and private equity players are holding on to the highest-ever pool of dry powder at $19.6 billion as of September 2023, up from $15.9 billion in the same period a year ago, according to data from Preqin, an investment data firm.
Even with the vast unallocated capital at their disposal, many venture capital firms are also hitting the road to raise new funds.
As of June 2024, 199 India-focused VC funds are in the market looking to raise an aggregate capital of $11.2 billion, according to Preqin.
Although investors have already begun to deploy the available dry powder, leading to an increase in overall funding, the pace of deployment is expected to accelerate going into the latter half of the year.
“The vintage or year of investment matters and investors who stayed out of the party in 2023 cannot afford to wait for two more years, as their commitment periods will also come to a close.
"Investors also like to spread their bets over a period and not have concentration in just one year as they could have a vintage issue.
"Hence, it’s reasonable to expect an increased pace of investments in the second half of the year,” said Murali.
