Anushruti Singh
In a recent interview, Manoj Agarwal, Co-founder and Managing Partner at Seafund, shared his insights on the evolving landscape of start-up funding in India. He discussed the impact of the global funding slowdown, the challenges and opportunities for early-stage tech investments, and the emerging trends in the start-up ecosystem. His perspectives provide a comprehensive overview of the landscape of start-up investments in India, offering valuable advice for founders navigating the complex funding environment.
Edited Excerpts:
How would you describe the current start-up funding landscape in India?
Start-up funding in India saw a slower movement in 2023 and in H1-2024, aligning with the global reduction seen in markets like the USA, UK, China and Israel. This is a part of an overall correction from the peak of 2020-22 in VC funding globally.
Post the funding winter, which started in the 2nd half of 2022 and continued well into 2023, we are now in a period of cautious optimism.
Given the recent shifts in global financial markets and economic uncertainty, the current global financial landscape presents both significant challenges and unique opportunities for early-stage tech investments. The major challenges are:
Economic uncertainty: The ongoing economic turbulence, driven by factors such as geopolitical tensions, inflation, and fluctuating interest rates, creates a challenging environment for securing funding. Investors may become more risk-averse, leading to tighter capital availability.
Valuation pressures: With market volatility, start-ups might face difficulties in achieving favourable valuations, impacting their ability to raise funds at terms that are beneficial for growth.
Regulatory changes: Increasing regulatory scrutiny, especially in sectors like fintech and health tech, can pose additional hurdles for early-stage companies. Navigating these regulations require resources and expertise that start-ups may lack in their early days.
While the key opportunities are:
Technological advancements: Innovations in AI and other emerging Deep Technologies continue to create new market opportunities. Start-ups that leverage them can disrupt traditional industries and capture significant market share.
Focus on sustainability: There is a growing emphasis on sustainable and environmentally friendly technologies. Start-ups focusing on green tech solutions are likely to attract interest from both investors and consumers
Diversification across regions: With the regionalisation of investments, there are opportunities in emerging markets that are less saturated and offer high growth potential.
How do you see the evolution of the funding environment post-pandemic?
In terms of funding, the first six months of 2024 saw Indian start-ups garner $5.3 billion, which is almost flat compared with the first six months of 2023 at $5.4 billion and lower compared with $19 billion in the first six months of 2022, according to the Indian tech start-up funding report of Inc42.
The number of funding rounds in H1-2024 was 504 compared with 470 in H1-2023 representing a marginal improvement, but still less than the 900 clocked in H1-2022.
The early-stage start-up ecosystem has evolved rapidly, with increased support from angel investors, incubators, and government initiatives. This has created a conducive environment for new ventures to thrive.
Funds like ours will benefit from the focus on these new emerging Investment areas as we are well equipped to evaluate and support start-ups in this space.
What trends do you see emerging in start-up funding for 2024 and beyond?
The current period in the life cycle of the start-up ecosystem, which is the post-pandemic period, has seen the emergence of new sectors. This includes deep tech areas such as Semiconductor, Biotech, Robotics, IOT, Space & Drones Tech, Defence, Climate-Tech & Global Software (SaaS and AI).
Areas like quick commerce, enterprise tech, fintech, EV, mobility and cleantech are dominating the funding rounds so far in 2024, especially in the late stage while emerging areas such as space, AI and semiconductor are also starting to attract investor interest in the early stage.
What are some of the key markets that are currently underexplored by most investors?
India’s start-up ecosystem is vibrant and full of potential, yet several areas remain underexplored by many investors. Here are some key opportunities:
Deep tech: This includes areas like artificial intelligence (AI), blockchain, and quantum computing. Despite the global buzz, deep tech start-ups in India are still relatively untapped. With the right support, these start-ups can lead to groundbreaking innovations.
Agritech: Given India’s large agricultural sector, there is significant potential for technology-driven solutions that can improve productivity and sustainability. Start-ups focusing on precision farming, agri-drones, and smart irrigation systems are gaining traction but still have room for growth.
Healthtech: The pandemic has accelerated the adoption of digital health solutions, but there is still a lot of untapped potential in health diagnostics, devices, and health management systems.
Skill development: While online education has seen a boom, there is a growing need for platforms that focus on vocational training and skill development, especially in tier-2 and tier-3 cities.
Renewable energy and cleantech: With India’s commitment to reducing carbon emissions, there is a significant opportunity for start-ups in solar, wind, and other renewable energy sources, as well as energy storage solutions.
Fintech for rural areas: While urban areas have seen a surge in fintech adoption, rural areas remain largely untapped. Start-ups that can provide financial services tailored to the needs of rural populations have a huge market to capture.
Mental health and wellness: There is a growing awareness of mental health issues, but the market for mental health apps, online therapy, and wellness platforms is still in its early stages.
These sectors not only offer substantial returns but also contribute to the overall development and modernisation of the Indian economy. Seafund is dedicated towards investing in the deep tech sector. We receive numerous proposals from deep tech start-ups, many of which present ambitious concepts. However, we at Seafund prioritise start-ups that not only demonstrate significant progress in their products or solutions but also provide clear revenue visibility.
How do you perceive the trend of ‘valuation corrections’ in the start-up ecosystem and how does it affect your investment strategy at Seafund?
The value correction is cyclical because of the headwinds due to global economic uncertainties, geopolitical tensions, and investor caution. While funding has slowed, resilience and innovation persist. Investors now prioritise value over hype, leading to a healthier investment landscape. Early-stage funding has seen some uptick compared to last year, though overall investments may not have grown at a rapid pace.
At Seafund, we are looking at this as the beginning of a new phase where we can invest in disrupting tech at the right valuation.
Has risk appetite among early-stage investors changed recently? If so, in what ways?
Risk appetite among larger investors touched dizzying heights as most investors were governed by FOMO. However, due to the funding winter and the subsequent valuation correction coupled with business models that were growing faster than anticipated during and post-pandemic, some of those businesses had to shut down or saw a slowdown. These factors brought some much-needed rationality among the investor community. As the funding winter starts to slow down, we are already seeing early-stage funding making a comeback. The deals may not be driven by FOMO only, but investors are looking at the overall aspect of what makes a business investible.
With India becoming a more prominent player in the global start-up ecosystem, how can local start-ups better position themselves to attract foreign investors?
India’s start-up ecosystem is growing rapidly, and there are several strategies that local start-ups can adopt to attract foreign investors:
Leverage government initiatives: Utilise programmes like the Startup India initiative, which offers funding support, tax benefits, and easier compliance regulations. These initiatives can make start-ups more attractive to foreign investors by reducing operational hurdles.
Focus on emerging sectors: Concentrate on high-growth areas such as fintech, deep tech (AI, blockchain, quantum computing), and renewable energy. These sectors are drawing significant interest from international investors due to their potential for high returns and innovation.
Build a strong digital presence: A robust online presence, including a well-designed website and active social media profiles, can help start-ups reach a global audience. Highlighting success stories, customer testimonials, and media coverage can build credibility.
Showcase market potential: Emphasise the vast market potential in India, driven by a large and growing digital population. Demonstrating a clear understanding of the local market and how the start-up plans to scale can be very appealing to investors.
Engage with global networks: Participate in international start-up competitions, incubators, and accelerators. These platforms provide exposure, mentorship, and networking opportunities with potential investors.
Transparent financials and governance: Maintain transparent financial records and strong corporate governance practices. This builds trust and confidence among foreign investors who may be wary of regulatory and compliance issues.
Collaborate with established players: Form partnerships with established companies and industry leaders. Such collaborations can provide validation and open doors to new markets and investment opportunities.
What advice would you give to founders looking to raise capital in the current market environment?
Founders should spend considerable time on explaining their vision and its revenue potential. Given the restricted supply of capital, try to avoid market segments which demand a new category creation specially in consumer internet as most investors would shy away from cash burn businesses. Focus on sharing real numbers and take the investors behind the lines to explain how these numbers are achievable. As a founder, find a market gap that needs a solution. In many cases, we see founders building a solution which is yet to find a problem.
