Startup77

Early-stage startups in India are navigating a tougher funding landscape as cautious investors become more discerning in their choices. A recent analysis indicates that only 25% of startups that receive seed funding manage to advance to Series A financing. This heightened scrutiny has resulted in a notable increase in startup closures over the past year, particularly for those struggling to prove their product-market fit (PMF).

The current climate has prompted a more stringent assessment of startups seeking follow-on funding, as investors reevaluate their earlier investments amid a decline in risk capital. According to data from Venture Intelligence, only one in four seed-funded startups has successfully raised follow-on capital in the form of Series A rounds. Over the last 12 to 15 months, many ventures have ceased operations due to inadequate product-market fit.

Prominent closures include software company Toplyne, which received backing from Tiger Global and Peak XV Partners; edtech firm Bluelearn, funded by Elevation Capital and Lightspeed; AI startup Nintee, supported by Peak XV; and upskilling platform FrontRow, backed by GSV Ventures. Toplyne had raised $17.5 million, while Bluelearn and Nintee secured $3.95 million and $3 million, respectively, before shutting down.

Reflecting a broader downturn in India’s startup ecosystem, the number of companies successfully attracting Series A funding dropped by 45% in 2023, falling to 127 from 232 in 2022. This figure is also 23% lower than the average of 166 deals recorded over the previous eight years.

A partner at a Bengaluru-based early-stage firm noted, “Early-stage investing revolves around risk-taking. The power law plays a role, leading to numerous startups shutting down post-seed funding. However, this shouldn’t be viewed negatively; it’s a healthy indication that those without PMF choose to exit without further financial burn.” He added that this trend may intensify as investors consider “bolder bets” in the burgeoning AI sector.

A report by 1Lattice highlighted that, in the quarter ending September 30, software-as-a-service and artificial intelligence emerged as the most appealing sectors for early-stage investments, collectively attracting $142 million. This total includes a $27.5 million round for Mukesh Bansal’s AI startup, Nurix.

Karthik Reddy, founder and managing partner of Blume Ventures, which has invested in firms like Unacademy and Spinny, emphasized that developing a funding funnel takes considerable time, and seasonal fluctuations shouldn’t be conflated with long-term trends. “A natural funnel exists globally. The number of Series A players will always be fewer than seed players, leading to a rapid narrowing of the funnel,” he explained.

Reddy pointed out that when Blume was founded in the early 2010s, there were only ten micro VCs in India, but this number has now surged to over 150. “This expansion at the top of the funnel enables more investors to provide substantial capital, fostering an environment where entrepreneurs can launch new ventures. Nevertheless, there has been little growth in Series A funding over the past decade, as larger funds primarily focus on Series B and later rounds,” he added.

A longer-term view reveals that out of the 3,246 startups that received seed funding from 2015 to 2023, only 821—approximately 25%—managed to secure follow-on funding, according to the Venture Intelligence study. However, once a startup attains Series A funding, its prospects for raising additional capital increase significantly, with chances rising to 41%.

Arun Natarajan, founder of Venture Intelligence, remarked, “A distinct quality filter is evident within the funding funnel. Typically, seed investors, whether VCs or angel networks, focus on the founding team without requiring proof of product-market fit. In contrast, Series A funding necessitates some evidence of PMF.”

The study further indicated that tech and tech-enabled companies accounted for more than 85% of seed investments from 2016 to 2023, with consumer-facing startups dominating at 54% of seed funding, outpacing B2B ventures.

While startups inherently carry significant risk, with 90-95% not evolving into major enterprises, early data indicates that around 45-50% of companies backed by Kae Capital at the pre-seed and Series A levels successfully secure Series A funding within two years of investment, according to General Partner Gaurav Chaturvedi. He acknowledged that the criteria for obtaining Series A funding have become more stringent compared to the influx of capital observed from 2021 to early 2023, during which many large funds actively participated in Series A rounds.

Mayuresh Raut, managing partner of Bengaluru-based Seafund, which has invested in startups like insurtech firm Finsall, acknowledged that the challenges in securing Series A funding reflect a global trend. However, India faces unique difficulties due to the rapid growth of its startup ecosystem and the relative infancy of its venture capital market.

“As India’s entrepreneurial ecosystem evolves and matures, this funding gap may gradually close. The significant capital raised by both domestic and foreign funds, many of which are nearing the end of their deployment periods, will likely alleviate the funding slowdown in the coming months,” Raut concluded.