Home / Companies / Start-ups /  As funding dips, startups to face tough FY21

Investors and founders of India’s startup ecosystem are bracing for a funding winter in 2020-21, as seed- and early-stage funding, considered crucial capital for budding startups, has plummeted in the March quarter.

In addition, the pandemic is also challenging startup valuations, especially in the consumer internet segment. Change in consumption patterns among consumers, due to the nationwide lockdown, coupled with limited partners (LPs) turning cautious about their fund allocations, will directly affect early-stage funding in the upcoming quarters, investors and industry experts said.

The number of seed-stage deals in India has fallen by at least 29% sequentially in the March quarter, while the number of early-stage deals (Series A and B) dipped by around 30% quarter-on-quarter (q-o-q), according to data sourced from Tracxn, an investment tracking platform.

Early-stage funding volumes took the biggest hit, declining by around 40% to $534.48 million from $890.62 million in the third quarter of FY20.

Volumes of seed-stage deals also dropped 22% to around $84.62 million in Q4FY20 from $108 million in Q3FY20.

Year on year, seed-stage funding volumes dropped 24.2% in Q4FY20, and early-stage volumes dipped by 18.5%.

However, FY20 witnessed an 18% increase in the total volume of deals (early, seed and late-stage) amounting to $14.15 billion, compared to $11.9 billion in FY19. Tracxn data also showed that the number of deals in India’s startup ecosystem in FY20 decreased by 14% to around 1,175, compared to 1,371 deals in FY19.

Although overall funding volumes rose in FY20, largely led by unicorns and late-stage firms, early-stage deals are expected to take a severe haircut in the next few quarters.

“Seed and early-stage funding will drop to a fraction in the next quarter. Few small funds, early-stage funds in the country today are in the position to follow through on open term sheets. It is fair to assume that there will be some refreshing in the terms sheets, delay in cash disbursements, and a re-look at valuations," said Anand Lunia, founding partner of early-stage fund India Quotient.

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