INDIA’S economy and stock markets are booming, but its startups are not.

Investors, once eager to pump billions of dollars into promising Indian tech ventures, are now going slow and cutting smaller cheques. They’ve been burnt by ignominious falls from grace – and valuations – for once-marquee young firms or market debutants of recent years such as digital payments company Paytm.

Karthik Reddy, managing partner at India’s Blume Ventures, which has invested in hundreds of early-stage startups, said his firm plans to do about eight new deals this year compared with 12 last year. It will invest bigger sums in firms it is confident about instead of spreading funds across more companies.

“When your existing portfolio is not showing gains, it is hard to be excited to do more,” he told Reuters.

Investors looking at Indian startups are much more focused on potential profitability, less enamoured with tech companies, and more interested in stable brick-and-mortar businesses, according to Reuters interviews with six executives at foreign and domestic investment firms as well as two CEOs at startups.

In January and February, India’s startups raised about US$900 million – a pace that signals another slow year after a six-year low of just US$8 billion in 2023, Venture Intelligence data showed.

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That’s a far cry from the record US$36 billion raised in 2021 or even the US$24 billion in 2022. In contrast, India’s stock market – spurred on by 8-per-cent-plus economic growth – has surged 19 per cent since the beginning of last year, hitting a record high this month.

The two-thirds drop in funding last year for Indian startups was also much steeper than the 36 per cent drop for US startups and the 42 per cent drop for Chinese startups, CBInsights data showed.

Significantly, Blume’s next fund is set to be either equal in size or smaller than its last one, which raised US$290 million – an unusual development for a top Indian venture capital firm.

India’s 10 biggest venture capital firms have over the past decade always embarked on bigger funds than their last one, a Reuters analysis showed.

“In this environment. I don’t think we can make big returns with more money,” Reddy said.

Lucky is not a business model

Less startup funding can have a broader economic impact. In the last eight years, startups generated 20 to 25 per cent of India’s new jobs and 10 to 15 per cent of its economic growth, an Indian trade body and McKinsey said in a report this month.

Much of the blame for investors’ relative reticence towards startups – described by Prime Minister Narendra Modi as the “backbone” of the country – can be laid at the sharp turnarounds in fortune for Paytm, online educational firm Byju and Uber-rival Ola Cabs.

Paytm’s shares have plunged 80 per cent since its 2021 listing. It was criticised at the time for valuing itself too high and is now in crisis after the central bank ordered its banking arm wound down for persistent non-compliance.

Byju, once the poster child for India’s startup ecosystem, was valued at US$22 billion in 2022 but now values itself at around US$200 million. It is at loggerheads with investors over a rights issue and cannot pay its staff.

In some cases, valuations have plunged even without a major crisis. Vanguard, an investor in Ola Cabs, slashed the ride-hailing firm’s valuation to US$1.9 billion, a drop of 74 per cent from 2021, although it did not give a reason.

Ashish Sharma, chief executive at Temasek-backed InnoVen Capital which has invested US$1.5 billion in Asian startups, said it was clear with hindsight that too much capital was poured into some sectors, leading to sharp increases in valuations.

“Some companies got lucky... (but) getting lucky cannot be a business model,” he said.

“One change is that we need to be more cautious when evaluating high-growth/high-cash-burn businesses and assess if the assessable market is large enough that it can attract growth investors to raise the next round of capital,” he added.

India’s Nexus Venture Partners, which manages US$2 billion, is “broad-basing” its bets beyond typical tech startups to capture a larger portion of the economy and because traditional sectors are less risky, according to a source with direct knowledge of the matter who declined to be identified.

Nexus, which has since December backed a sportswear manufacturer and a coffee chain, did not respond to a request for comment.

In one brighter sign, Japan’s SoftBank is considering deploying up to US$300 million in India this year, according to a source briefed on its plans.

That comes after not signing a single new cheque in India in two years – a sharper pullback than in other regions by the tech investment behemoth.

“Most (Indian) startups were too richly valued and SoftBank could not justify those valuations,” said the source, who was not authorised to speak to media and declined to be identified.

SoftBank, which invested US$11 billion in Indian startups between 2014 and 2021, did not respond to Reuters requests for comment. REUTERS