Investor Shift Alert: What 2023 Funding Data Means for 2024 Startups

2023 Investor Rethink: A Seismic Shift Shaping India's Funding Landscape

The first half of 2024 reveals a fascinating investment landscape, dramatically reshaped by the events of 2023. Bain & Company's India Venture Capital Report 2024 paints a clear picture: investor behavior underwent a significant transformation, reflecting broader economic trends and emerging market opportunities. This analysis by team TICE.NEWS delves into the key themes that defined 2023 and continue to influence 2024: 

VCs Go Small, PEs Go Big: What's Driving the Investor Makeover?

• Democratisation of Investments: A convergence between Venture Capital (VC) and Private Equity (PE) strategies emerged in 2023. PEs, traditionally focused on larger deals, doubled their investment volume by participating in fewer, high-value transactions. Examples include ADIA's investment in Lenskart ($350 million) and Temasek's backing of Ola Electric ($500 million). This strategic shift indicates a focus on securing significant influence and potential returns in marquee deals.

India's Startup Ecosystem: Domestic VCs Rise as Global Players Retreat

• VCs Target Early-Stage Growth: Conversely, leading VCs recalibrated their focus towards smaller deals (under $50 million). This pivot suggests adaptation to heightened competition and a strategic aim to nurture high-growth, early-stage ventures. By concentrating on smaller investments, VCs may be positioning themselves to capitalise on the next wave of disruptive startups.
• Crossover Funds: A Dramatic Decline: The activity of crossover funds, known for late-stage investments blurring the lines between VC and PE, witnessed a staggering 90% compression. Investment giants like Tiger Global and Softbank significantly reduced deal-making. This retrenchment can be attributed to market volatility and a strategic reevaluation of risk tolerance.

Family Offices: The Silent Partners Still Backing India's Future

• Family Offices and CVCs: Cautious Yet Present: Family offices maintained their presence but halved their deal activity (2022-2023). Despite this decrease, they remained crucial early-stage investors. Key deals include MEMG Family Office's investments in Bluestone ($20 million) and FirstCry ($15 million). This sustained involvement highlights their strategic role in fostering nascent businesses during economic turbulence.

Are CVCs Out? Why Corporate Venture Capital Might Be Taking a Backseat

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• Corporate Venture Capital (CVC) Activity at a Low: CVCs witnessed their lowest deal activity in over five years (83 deals in 2023), constituting only 9% of all VC deals (down from 12% in 2022). This reflects a cautious stance by corporations navigating uncertain market conditions.

Fund-Raising Slowdown? New Domestic Funds Signal Long-Term Confidence

• Fund-Raising Slowdown and Domestic Leadership: Fund-raising in 2023 saw a notable slowdown, with total funds raised at $4 billion compared to $8 billion in 2022. This reduction can be attributed to cautious capital deployment and a buildup of dry powder from previous years' record-breaking fundraising. Interestingly, a "change of guard" emerged with domestic VC funds spearheading fundraising efforts, accounting for over 90% of the total capital raised.

Thematic Investing Takes Off: Sustainability & Gaming Lead the Charge

• Thematic Funds and Fresh Capital: Domestic VCs launched numerous thematic funds targeting sectors like sustainability and gaming (e.g., Omnivore's $150 million sustainability fund and Lumikai's $25 million gaming fund). This thematic approach demonstrates strategic foresight in addressing evolving market demands. Notably,maiden funds constituted a quarter of the total fundraising, showcasing sustained investor confidence in India's potential.

Key Startup Investment Themes in 2023-24

A Roadmap for the Future of Startup Funding 

The 2023 investment landscape was marked by strategic recalibrations across investor categories. As the market evolves, these trends provide a roadmap for understanding the shifting dynamics of  investor behaviour and fund allocation. This knowledge empowers both startups and investors to navigate the constantly changing investment landscape of 2024.