There are incipient signs that venture capital and private equity funding into startups, which has been on the ebb over the last 15-18 months, is seeing distinct sings of revival. Many of the larger funds that had stayed away from India are returning in a big way.

Last month, there were reports of e-commerce player Meesho talking to Softbank, Tiger Global, and other firms to raise around $300 million, which sent a ripple across the startup space, which has been in the grip of a so-called ‘funding winter’ since late 2022.

This is significant as it also means the Japanese mega investor is pressing the restart button in India after a hiatus of 18 months. It could encourage other investors, too, who have been watching from the sidelines as many established and seemingly well- entrenched startups in India have suddenly started having troubles in their operations and run-ins with regulators.

In the first quarter of 2024, VC investments in Indian startups crossed $2 billion from 183 deals, data from Venture Intelligence showed. This is double the investments seen in the December quarter. In fact 2023 was the worst year for the sector with startups churning a little over $7 billion compared to $25 billion in 2022.

While funding is still slightly lower than a year ago, analysts said that the quality of financiers and ticket size are increasing .

Some of the big deals that have taken place in the March quarter, according to Venture Intelligence are enterprise software firm raising $150 million from Vistara Growth, FTV Capital and others, mobile app Pocket FM raising $103 million from Stepstone Group, Lightspeed Ventures and others and beer maker Bira raising $50 million.

Indian family offices are also stepping into the action. For instance, media reports said that Azim Premji’s investment fund, Premji Invest, was looking to invest $50-70 million in graphic design tool startup Canva. It had also co-led a funding round of $53 million with General Catalyst in Hippocratic AI.

Stringent due diligence

While late-stage funding steeply declined last year, this year more money is making its way into late-stage investments where startups would already have established traction in their operations. The gestation period for the deals is also longer with VCs drilling deeper into the financials and being picky and choosy.

“Startups who have managed to turn around their business models and move towards profitability, have robust cash flow management and are no longer haemorrhaging cash - those are still attractive and are seeing fund raise,” said Darshan Trivedi, Associate Director, Wodehouse Capital Advisors.

He pointed out that funds have ample firepower. “So it’s not that they are short on cash. It’s just there has to be a fitment.”

Deal gestation, which used to take 5-6 months, is now elongated. “The due diligence requirements are getting more stringent with startups. It is my personal understanding that the VCs are drilling a bit deeper into investing before they take a call.”