Outlook 2023: What's In Store For Startups?

On the global front, even the recent economic headwinds could not deter India’s startup growth story for a long. While the current statistics show the trajectory of startups blooming but an overall conservative funding sentiment in the ecosystem cannot be ignored.

In terms of funding this year, the Indian startup ecosystem has witnessed a 35 per cent year-on-year fall in total funding until Dec 5, 2022, at USD 24.7 billion, a report by startup data platform Tracxn reveals.

Ghazal Alagh, Co-founder and Chief Innovation Officer, Mamaearth points out three stages of building a startup. Growth more, invest more, sustainability more and explaining these further she said, “In the initial three years, utilise the cash wisely for excellent execution, in the next three years focus on growing under certain guardrails and going forward, focus on expansion and plans.”

Leaders today are metaphorically urging startups founder to be like cockroaches and become more resilient, persistent and agile in order to sail through.

Turbulent Times

The year 2022 started on a very high note with 43 unicorns added in 45 weeks since the start of 'Azadi ka Amrit Mahotsav' on March 12, 2021. But eventually, the funding winter crept in. According to a PwC India report, startup funding in India has hit a two-year low at USD 2.7 billion in the third quarter of 2022. In the July-September period, only two startups i.e. health tech startup 1mg and delivery startup Shiprocket joined the Unicorn club mirroring the massive decline.

India is expected to witness a year-on-year consistent annual growth of 12-15 per cent. India has about 50,000 startups in India in 2018, around 8,900 – 9,300 of these are technology-led startups 1300 new tech startups were born in 2019 alone implying there are 2-3 tech startups born every day.

Rightsizing For The Better

The Infosys Co-founder and Chairman Nandan Nilekani recently said he admired the present-day young founders’ business understanding and strategic thinking but worried if they were building for the long haul. The recent bloodbath in the Indian startup ecosystem has been a cruel picture of how businesses have been built.

Cutting back on spending, rising inflations, the Russia-Ukraine war and economic uncertainty have been the dominating factors for the layoff saga across the sectors.

Over 17000 professionals have been laid off, Byju’s, Vendatu, Unacademy, Meesho, Cars24, Ola, BlinkIt and many more startups fired employees citing various reasons. Going forward, according to the industry leaders, the funds are expected to dry up and more such job cuts can be expected. Especially in edtech, the steep decline could be seen exactly contrary to what happened in the year 2020-21 when the country witnessed the magical rise of edtech as a sector.

The Real Stats

The third quarter of 2022 witnessed USD 3 billion in funding, which is 57 per cent lower than Q2 2022 and 80 per cent lower than the peak funding of USD 14.9 billion received in the same quarter last year, according to the Tracxn India Tech Q3 2022.

This substantial shift indicates that the investors are not willing to make large investments till economic conditions stabilise.

From investors’ lens, to be sustainable in the longer run, startups in this age need to build fundamentally robust business models with principally strong unit economics, not running after achieving bloated valuations.

An in-depth view into the determining trends of Indian startups and investment flow. Below are the significant trends which evolved in the year 2022 and some of them will continue to loom going forward in the year 2023.

Towards More Minicorns, Soonicorns and Unicorns

With changing trends and global breakdowns, the growing pressure of becoming profitable businesses is making founders go back to basics and build strong foundations. Since there is a lot of clutter right now, as Charles Darwin's theory persists, survival of the fittest will decide the startup’s future in 2023.

Even in the fast-changing scenario, 1mg became India’s fifth health tech unicorn after raising USD 40 million in a round led by Tata Digital. The latest startup to join the unicorn club in August 2022, Shiprocket, a Gurugram-based third-party logistics service provider founded by Saahil Goel, Vishesh Khurana, Gautam Kapoor and Akshay Gulati received USD 30 million.

The question arises – how? With global uncertainties and investors holding on dry powder, businesses will have to focus on being cockroaches than unicorns. Hence expected trends would be keen focus on profitability and sustainability, Kashish Grover, COO, Legalpay explains.

An unexpectedly heavy flow of capital towards early-stage startups can be witnessed for lesser returns but with lower risks. As per the report, the average ticket size also saw a drop across all funding stages, with the late stage seeing the biggest drop of over 70 per cent, from USD 142 million in Q3 of 2021 to USD 42 million in Q3 of 2022. This indicates that investors are being conservative which is the biggest reason for the current funding crunch towards growth-stage startups.

Shreedha Singh, Co-Founder, T.A.C says, “Standards would set high for the startups as most profitable, innovation and high impact products.”

The investor sentiment however seems to be sitting on the fence as nobody wants to go wrong with the trend of investment that is impacted globally.

Celebrity More Than Just Brand Ambassadors

There is no doubt that India is walking the path of self-discovery. In the last couple of years, many successful people, ultra-high-net individuals, and non-resident Indians found investment in startups as a new-age asset class. Bollywood actor Ranveer Singh has made his debut investment in the direct-to-consumer (D2C) brand SUGAR Cosmetics.

The increasing trend of Bollywood actors and sportsmen joining the league of startups along with venture capitalists and private equity investments can be witnessed.

Over 10 Bollywood celebrities joined not only as brand ambassadors but invested in startups in order to make the most out of it. Deepika Padukone launched a self-care D2C startup 82`E, Shilpa Shetty Kundra invested in D2C ecommerce unicorn Mamaearth. Varun Dhawan infused funds in a healthtech startup, Katrina Kaif runs her beauty brand Kay Beauty and Virat Kohli-Anushka Sharma duo has also invested in a plant-based startup.

Suniel Shetty has become an active investor in new-age brands, he shares his journey from being a film producer to a startup founder. While speaking at one of the latest industry summits he said, “I am pretty successful in business just because I have a great team. A good product and a good team and nothing else. Belief in yourself and a strong mindset is what it takes to start something new.”

Sectors to shine

The nation today has a robust ecosystem of young disruptors, angel investors, venture capitalists and more change-making agents. It has garnered significant attention due to the sheer volume of entrepreneurial ventures and the global fund movement.

While looking forward to the bright side, Srinivas Rao Mahankali, CEO, T-Hub states, “Market correction will take place in terms of salary, 5G penetration will open up an opportunity for virtual and augmented reality, investment on Sustainability and GreenTech startups will go up.”

Alongwith the current focus on Green tech, electric mobility, deep tech, proptech, blockchain, healthcare tech, security tech and fintech will continue to buck the trend and remain strong or grow even faster in 2023

Towards The Rise and The Rise Of Indian Startups

Karan Bajaj, Founder and CEO, WhiteHat Jr as a seasoned entrepreneur discusses the new norms of developing stronger startups. He opens up about his upcoming launch of a new company in the infra-tech segment. “Top VCs were looking for and will continue to look out for structurally solid businesses with positive unit economics and path to profitability,” Bajaj said.

Adding to the same, he stated that there is more rigour while evaluating whether a startup would lead to a successful IPO. Late-stage investors are looking at the startups with more diligence whether their public market thesis is as robust or not.

A Tracxn report reveals that in September 2022, Indian startups received USD 752 million in funding down by 15 per cent as compared to August 2022. However, there are always outliers both concerning brands and investors that continue to perform and grow in the business and investment sectors.

2023 and Beyond

Sudhir Sethi, Founder and Chairman, Chiratae Ventures while speaking at a summit said, “In the times of unicorn, startups are scaling to a billion revenue each. I believe, in the next 5 years there will be 20-25 startups with a billion revenue each.”

Additionally, while speaking about domestic capital flow, Chiratae’s Sethi explains, “Around 10-15 per cent of the capital deployed in India is from Indian investors. In the next 5 years, this could go up to 25-30 per cent. Indian investment in the risk asset class in Indian startups at scale has never happened before which is also giving confidence to international investors.”

At the Macroeconomic level, global meltdowns have led businesses and investors to build streamlined businesses, leading to stronger revenue-focused growth rather than valuations oriented.

In the last two quarters, India saw the birth of only two unicorns but moving ahead, India is expected to witness 250 unicorns by 2025 or privately held startups with USD 1 billion valuations or above by 2025.