crypto funding: Amid rising gloom, are VCs reluctant to fund Indian crypto players?

Synopsis

“Even in the longer run, VCs have been funding crypto startups on the back of rising retail interest in India. India has the potential to become a leader in the crypto ecosystem. If the growth rebounds, VCs would be willing to fund,” he added.However, not everyone

The crypto market is in a tight bear hug and market mavens believe that crypto winter is likely to last longer than what was expected.The crypto market is in a tight bear hug and market mavens believe that crypto winter is likely to last longer than what was expected.

The gloom in the crypto market has turned firms operating in the space risk aversive. Many of them are looking to trim their payroll size in order to conserve funds amid a freefall in the digital token market.

Not only this, even stringent taxations and regulatory frameworks are hurting crypto players. The pessimism has affected deal size and volumes in the crypto industry.
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Market experts are divided on the future funding of the industry as they believe that the crypto industry is very nascent and its journey has remained turbulent. Short-term pain, however, is unavoidable, they add.

Arvind Agarwal, Co-Founder and CEO of C4D Partners said despite unclear regulations in India, venture capitalists (VCs) heavily funded crypto startups. In Q1 of 2022, VCs invested more than $10 billion, the highest in a quarter.

“Even in the longer run, VCs have been funding crypto startups on the back of rising retail interest in India. India has the potential to become a leader in the crypto ecosystem. If the growth rebounds, VCs would be willing to fund,” he added.

However, not everyone agrees on this. Other experts believe that funding activities are likely to slow down and valuations of the crypto players may take a hit. Though, they see enough potential for Web 3.0 space.

Vineet Budki, Managing Partner & CEO, Cypher Capital believes investing in later-stage startups may slow down due to a liquidity crunch in the market.

“However, early-stage crypto companies with an actual use case of tokens and unique products will raise maximum funds in the current scenario. We expect some moderation in the valuations of these companies.”

Market experts believe VCs will have to trim their return expectations or increase the time horizons of their investments. The deep-pocketed players need to be selective about their investments and look for companies that solve real-life problems. Even the company management would be a significant factor to consider.

The new taxation rules announced in the union budget 2022 have come into force. This has hurt the domestic crypto projects and trading volumes have plunged about 90 per cent on some platforms.

The government implemented levying a 30 per cent tax on gains from the sale of crypto assets without any exemption from April 2022. The rule of 1 per cent tax deducted at source (TDS) on crypto transactions also came into force on July 1, Friday.

Market players believe India’s tax rules would hurt the topline of crypto exchanges and may drag the bottom line further.

Agarwal from C4D Partners said customer participation in the market is highly correlated with market performance. High taxes, unclear norms and muted market sentiments are slowing down the growth, he said.

However, he believes that the long-term growth story for domestic crypto startups remains intact. “Many Indian startups are building new products and platforms using blockchain technology,” he added.

Lauding the tax steps, even VCs requested the government to clear the ambiguity over the legitimacy of the crypto space as it would further hinder the growth of the industry.

Budki from Cypher Capital said India has become ground zero for innovation in the Web 3.0 space and we are still seeing amazing founders solving problems with blockchain.

The government should have a long-term strategy for creating an amicable environment for the industry, he said. “This will mutually benefit the government and the Indian innovators who are able to secure capital for the growth.”

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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Updated: 07/01/2022 — 18:00