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The digital world’s crash in 2022 — large-scale layoffs by big tech firms like Meta, Twitter, Google and Amazon, as well as a funding slowdown for startups — after the euphoric highs of Covid-year 2021 is more of a course correction than a reason to worry.
If we see the numbers, 2021 stands out as an abnormal year. Total funding in October-December 2022 showed a massive 71% drop to $3.3 billion from $11.5 billion during the January-March period, as per data sourced from Tracxn. Similarly, total funding in 2022 dropped 37% to $25.9 billion compared to a year earlier. In contrast, 2021 saw a total funding of $40.8 billion, which was not only over 200 times higher than 2020, but also the highest in a decade.
Analysts view the decline more as a return to ‘normal’ levels that prevailed in pre-pandemic 2019.
They expect the trend to maintain hereon, with funding activity in 2023 broadly remaining at 2022 levels.
“The funding activity in 2021 was a big spike and it was an abnormal year. That year’s activity was driven by low cost of capital and Covid-led exuberance for tech companies. In terms of funding activity, 2019 looks like a more fair comparison,” said Rahul Chowdhri, partner, Stellaris Venture Partners.
A similar return to the pre-pandemic normal is taking place in the big tech world, where hiring in some cases during Covid times went up by 100%. “Covid benefitted these (big tech) firms immensely as consumer engagement increased manifold. What they would have achieved in five-10 years, they achieved in five-10 weeks. With people returning to offices, the party is ending and it’s the beginning of a tech winter,” said Manish Maheshwari, former CEO of Twitter India. Citing Twitter India, he said the staff in 2019 was only a handful of people, but went up to 230 by 2022.
Nick Clegg, president, global affairs, Meta, also said recently that big tech firms had seen sharp growth during the Covid years and hired heavily, but as the pandemic receded, growth normalised, forcing companies to lay off staff.
“For 2023, the deal flow will continue for early-stage because the risk is low and cheque sizes are small while the pools of capital have increased. On the other hand, growth-stage and late-stage investors, which are fuelled by foreign capital, will be affected by what is happening in their own jurisdictions. So, it will likely result in shrinkage next year,” said Anup Jain, managing partner, Orios Venture Partners.
Vivek Soni, a partner for private equity services at EY India, said the January-March quarter of calendar year 2023 may see higher activity because deals that took longer to close in 2022 will materialise during that period and a clearer trend can be established only after that.
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