India overtook China in latest unicorn creation in 2022

India's venture capital (VC) improvements experienced a recalibration in 2022 due to the rising macroeconomic uncertainty and recessionary fears, according to the India Venture Capital Report 2023 by Bain & Company and the Indian Venture and Alternate Capital Association (IVCA). Deal value in India decreased by 33% from $38.5 billion to $25.7 billion in 2021-22, with the majority of the decline taking place in the second half of the year as macro headwinds intensified. However, early-stage investments saw sustained momentum, resulting in more than 1,600 VC deals in 2022, and a slight expansion in deal volume.

According to Bain & Company's annual India Venture Capital Report 2023, India created more new unicorns than China for the second consecutive year in 2022. Additionally, non-metro startups in India received 18% of the funding share, and nine out of 23 unicorns that emerged in 2022 were from cities outside of the top three metros. This indicates a move towards more democratic funding distribution across the country.

“Overall funding saw a drop in 2022 led by a drop in late-stage large deals. The ecosystem faced foundational shifts as VCs pivoted focus to unit economics and start-ups faced a challenging year with multiple regulatory challenges, lay-offs and corporate governance issues surfacing. Despite the overall softening, a few areas continue to offer hope SaaS funding remained in line with 2021 highs and early-stage deal-making saw sustained momentum," Arpan Sheth, Partner at Bain & Company, said.

Funding to start-ups in non-metros grew to 18% share and 9 out of 23 unicorns added in the year emerged from cities outside of the top 3 metros indicating a shift to more democratic funding geographically.

“Over the years, the alternative investment asset class has demonstrated remarkable resilience. While 2022 marked a year which heralded PE/VCs to adapt in the face of unprecedented challenges; it also went on to witness record fund-raising and all-time high available dry powder. This only reinforces global investors’ confidence in India to be one of the few bright spots of growth," Rajat Tandon, President, of IVCA, said.

Software-as-a-service (SaaS) and Fintech continued to see momentum relative to 2021, growing in salience from ~25% to ~35% of total funding in 2022. Funding grew 1.0x in SaaS, led by increasing depth in assets, and 0.9x in fintech, led by innovation in the emergent segment.

EV witnessed 2.4x growth in overall investment value due to policy-led cost competitiveness, growth in adoption led by innovative business models, and broader interest across the value chain.

The report further noted that the investor landscape has broadened while the share of leading funds reduced to <20% from 25% as activity from global crossovers and hedge funds slowed down, traditional PE funds continued to demonstrate an interest in select growth equity deals and participated in several $100 million+ megadeals, deepening the pool of growth capital available.

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