Incubate Fund Asia raises $50 million to fuel startup growth in India, SE Asia

Startup growth in India: Incubate Fund, a Japanese venture capital (VC) fund specialising in seed-stage investments, has announced the successful first close of its third fund with a target corpus of $50 million or approximately Rs 416 crore. This is the third fund from the Japanese VC in India which specialises in seed-stage investment. To further emphasise their commitment to supporting early-stage startups in India and South East Asia (SEA), their India-focused entity has been rebranded as Incubate Fund Asia.

There are about 5,396 seed-stage startups in India. There have been 8,206 rounds of funding amassing $5.1 billion in fundings, according to Crunchbase. The funds raised will be used for both early-stage investments and follow-on investments in startups that exhibit strong fundamental growth, according to a statement. 

The fund aims to create a portfolio comprising approximately 20 startups with its third fund, allocating 40 per cent of its total investible corpus to establish the portfolio and the remainder to back the most promising ventures within it, the VC firm added.

Incubate Fund claims to have firmly established itself in India's dynamic startup investment landscape since 2016, actively taking on a lead investor role by establishing a dedicated fund for Indian startups. With a global presence and offices in key locations including Tokyo, Singapore, Bangalore, Mumbai, São Paulo, and Mountain View, the firm has made notable investments in startups like Captain Fresh, Yulu, ShopKirana, Plum, and others, playing a pivotal role in guiding these startups to market leadership positions in India.

Nao Murakami, Founder and General Partner of Incubate Fund Asia said, "Our mission is to empower startups and fuel innovation across Asia. With the target fund closure of $50 million, we will be ready to significantly enhance our support to emerging ventures, driving sustainable growth and innovation. Incubate Fund Asia remains deeply committed to its vision of nurturing innovation and catalysing the growth of startups, ultimately contributing to the development of a thriving entrepreneurial ecosystem across Asia.”

In 2019, Incubate Fund launched a $18 million Fund II.

Incubate Fund Asia has provided backing to 27 Indian companies, including ventures like ShopKirana and Captain Fresh. Their investments span various sectors, including B2B, B2C, Supply Chain, and consumer tech startups, operating across both Tier I and Tier II markets. The contributions made by Incubate Fund Asia have aided in advancing business digitisation and innovation, with the VC firm consistently investing in the range of $500,000 to $1.5 million. 

“I feel proud to say ShopKirana was the first investment of Incubate Fund in India back in 2016, since then we have raised four rounds and they continue to back us in each of them. They have stuck with us during highs and lows, always pushing us to do better, giving us complete access to their rolodex and so much more," said Sumit Ghorawat, Co-Founder of ShopKirana.

Japan-based Incubate Fund has nurtured over 200 startups in Japan and Asian regions. It expanded to India in 2016 and started Incubate Fund India, now Incubate Fund Asia. The firm actively engages with startups, offering hands-on support and mentorship, making them a vital partner for entrepreneurs.

Incubate Fund Asia takes on a prominent role as a lead investor by committing a substantial 80 per cent of its funds to Indian startups. This commitment spans various sectors, including B2B, B2C, Supply Chain, and consumer tech markets.

Indian startup ecosystem

Despite the challenging backdrop of the COVID-19 pandemic, the Indian startup ecosystem has showcased resilience and optimism by forging ahead with innovation and digitalisation. Notably, Indian startups experienced a continuous influx of funding from 2019 onwards, reaching its zenith in 2021, which was dubbed the "Year of Unicorns" as it birthed at least 44 unicorn startups. The government recognised over 80,000 startups by 2022, according to Statista.

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In 2022, the well-established startup hubs of Bengaluru, Delhi, and Mumbai continued to dominate the landscape in terms of deal count. Nevertheless, an increasing number of investors are now acknowledging the untapped potential in Tier II and Tier III cities, a report by Statista said. These emerging urban centres offer advantages such as a vast talent pool, lower operational costs, and burgeoning consumer markets. Additionally, startups in these cities are uniquely positioned to address regional challenges. E-commerce, enterprise technology, and fintech have led the way in terms of funding deals over the past few years. 

India's diverse funding ecosystem encompasses various sources, including angel investors, venture capitalists, crowdfunding, and government initiatives.

Navigating a funding winter

The Indian startup ecosystem has found itself in the midst of a prolonged "funding winter" due to factors like rising interest rates, inflation, tightening monetary policies, and concerns about an impending recession. Both the value and number of funding deals experienced setbacks in 2022, and industry experts predict this trend to persist into 2023. Escalating prices of commodities and energy have raised operational costs, making it challenging for startups to achieve positive cash flows, subsequently affecting investor sentiment. Foreign investments in Indian startups were notably impacted by the global economic slowdown.

Furthermore, global investors are grappling with the realisation that many Indian startups, funded earlier, were considerably overvalued, leading to reductions in valuations for companies like BYJU'S and Swiggy. The funding shortfall has also spurred mergers, consolidations, mass layoffs, and downsizing of operations for several startups, and even some shutdowns, a report by Statista said.

Despite efforts by central and state governments, startups continue to face difficulties in accessing capital at various stages of their business journey, particularly in the early stages. Cumbersome regulatory processes and compliance requirements present long-term hurdles to a startup's growth trajectory. The inclusion of foreign and Non-Resident Indian (NRI) investors under the purview of the "angel tax" in the 2023 Union Budget has raised concerns among Indian startups, indicating potential challenges in securing future investments.