Funding into Karnataka-based tech startups has experienced a steep decline of 72% in 2023, according to a report published by Tracxn, a data intelligence platform. Despite Karnataka’s prominent position as the leader in India in terms of overall funding and being home to 39% of the country’s unicorn companies, the state’s tech startup ecosystem only received $3.4 billion in funding last year, a significant drop from the $12.2 billion raised in 2021 and the $20.4 billion raised in 2020.
Late-stage investments in 2023 amounted to $2.3 billion, reflecting a plummet of 74% compared to $8.9 billion in 2022. Meanwhile, early-stage funding reached $784 million, a decline of 71% from the previous year, and seed-stage funding dropped by 54% to $294 million. In terms of specific startups, only PhonePe and Udaan managed to secure the highest funding in 2023, raising $623 million and $377 million in Series D and Series E funding rounds respectively.
Notably, no new unicorns emerged from Karnataka’s tech startup scene in 2023, a sharp contrast to the seven unicorns produced in 2022 and the impressive 18 in 2021. Additionally, no new companies from this sector went public in 2023, whereas there were two initial public offerings (IPOs) in 2022, as revealed by the Tracxn report.
The report also highlighted the top-funded segments in 2023, which included fintech, retail, and enterprise applications. Karnataka’s fintech sector secured a total of $1.15 billion in funding last year, experiencing a decline of 51% compared to the $2.4 billion raised in 2022. The retail sector witnessed funding amounting to $956 million, reflecting a 56% decline from the $2.16 billion raised in the previous year. Similarly, the enterprise applications sector attracted investments worth $928 million, a significant drop of 68% from the $2.89 billion raised in 2022.
Bengaluru emerged as the leader in terms of city-wise funding in 2023, with startups based in Bangalore raising $3.4 billion, while those based in Hubli raised a mere $121,000.
The decline in funding for Karnataka’s tech startups can be attributed to various factors, including prevailing macroeconomic conditions and geopolitical issues. According to Pratekk Agarwaal, founder of GrowthCap Venture, political instability, regulatory directives, and shifting investor preferences towards seasoned founders navigating regulated landscapes have contributed to this trend.
Investors are now recalibrating their strategies and focusing more on ventures with established leadership and regulatory foresight. Startups are urged to align with investor expectations while navigating regulatory frameworks and emphasize resilience and adaptability to thrive in an ever-changing funding ecosystem.
Anirudh A Damani, Managing Director of Artha Venture Fund, explained that this changing climate has reinforced the importance of sustainable business models and prioritized unit economics and revenue growth over inflated valuations. Venture capitalists and founders alike are now aiming to build robust and scalable businesses with clear paths to profitability.
Looking ahead, as the calendar year progresses and post-election, a renewed vibrancy is anticipated in Karnataka’s tech startup ecosystem. The VC community is sending a clear message for entrepreneurs to focus on building resilient businesses with a long-term value creation outlook.
It is crucial to note that Karnataka was the first state in India to introduce a dedicated Startup Policy back in 2015. The state boasts the highest per-capita income in India, amounting to ₹3.01 lakh, as per the Economic Survey of Karnataka (2022-2023). The government has also shown commitment by providing approximately ₹200 crore in funding to support 874 startups via the Elevate Scheme. Furthermore, the establishment of an incubation center called ‘Innoverse’ with an allocation of ₹50 crore demonstrates the state’s efforts to incentivize and support startups.
In conclusion, the sharp decline in funding for Karnataka-based tech startups emphasizes the need for startups to navigate challenging regulatory landscapes while aligning with investor expectations. Despite the challenging circumstances, the focus on sustainable business models and long-term value creation has the potential to revive the ecosystem and attract renewed interest from investors.
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