The startup ecosystem has been witnessing a funding crunch that started in 2022 and has been continuing since then. Homegrown venture capital (VC) firms have been backing the early-stage startups; however, owing to the fact that the larger pie of the growth-stage funding comes from overseas VC firms based in the UAE, Saudi Arabia and Europe, the growth-stage startups are the hardest hit. The recent Silicon Valley Bank (SVB) collapse has only aggravated the crisis because most early-stage startups have deposits in the SVB.
Solane Sehgal, Founding General Partner of Lumikai Fund, said, "In the last three years, we have not been focusing on the macro of the events that have taken place. We went through multiple black swan events without going through recession: funding cuts, layoffs, economic slowdown. Before funding winter, the western world floated their return, which they receive from the interest from stocks, crypto, etc., and Indian startups' leveraged it and garnered most of that fund. The drastic increase in the fed rate from nearly zero to 5 per cent in 12 months was the macro factor behind the SVB collapse. However, it was only yielding 2 per cent on deposits, which led to its demise."
Amid the uncertainty, investors preferred investing in a less risky asset and earning a higher yield compared to investing in startups. When capital for VCs dries up, funds for startups dry up.
A lot of Indian startups end up raising capital from international VCs that are based overseas. "Investing in early-stage startups is a risky investment decision. Young companies take much longer to yield returns. Due to the fact that it is so risky, the investment thesis should not be on the rewards you can get. Work on your own mitigation strategy to yield better returns. Create a risk-mitigation strategy across industries. When a company gives returns, your co-founders are doing well, but when a portfolio does well, the credit goes to the investors," explained Padmaja Ruparel, Co-founder of IAN and Founding Partner of IAN Fund.
Given the fact that startups all over the world have been hit by black swan events, investors are looking for safe assets to invest in. Experts have been flagging that the funding in the VCs may dry up, and it would impact the startups relying on the limited partners (investors backing the startups) to maintain their cash flow. Moreover, the funding freeze will remain unless and until investors start considering it a safer option than other assets.