2023 bore witness to a stark transformation within Indian startups landscape, despite a funding winter and corporate governance concerns as funds funneled into the segment dwindled to approximately USD 8 billion, a significant downturn compared to previous years. This downturn spotlighted the resilience and adaptability of startups grappling with an array of challenges.
Edtech and health tech segments, which had previously experienced meteoric growth during the pandemic, found themselves in the throes of financial uncertainty. Several firms within these sectors shuttered their operations, leading to substantial valuation declines, notably witnessed in giants like BYJU’S and PharmEasy, which experienced plummeting valuations ranging between 85-90 percent.
The year also witnessed the unfortunate fallout of this economic turbulence, with Indian startups estimated to have laid off over 15,000 employees.
Indian Startups Funding Plummets to USD 8 Billion in 2023 Amid Governance Concerns
According to a report by GlobalData, Indian startups witnessed a 65.8% drop in funding in terms of value between January and November 2023. They raised $6.9 billion across 1,013 venture capital (VC) funding deals in the past 11 months this year. Last year, the startups had raised $20.2 billion in the same period.
Despite these challenges, there remains a sense of cautious optimism among investors, foreseeing robust growth for the maturing startup ecosystem in the upcoming year. Rahul Taneja, a Partner at venture capital firm Lightspeed, emphasized the cyclical nature of the industry, expressing that this phase should be seen as a part of the ecosystem’s evolution, wherein challenges like consolidation and valuation corrections are expected but ultimately contribute to progress.
However, the decline in total funding, which plunged from an impressive USD 35 billion two years ago, coupled with corporate governance issues surfacing in several promising unicorns, heightened concerns within the investor community. Companies like BharatPe, GoMechanic, 4B, and BYJU’S grappled with red flags related to corporate governance practices and funding, fostering a climate of uncertainty.
The shift in funding dynamics was also evident in the observations of Apoorva Sharma, Managing Partner at debt fund Stride Ventures, who noted a significant decline in the average ticket size for investments, signaling a shrinking investment landscape year on year.
The count of unicorns in India also witnessed a decline, with Fundamentum Partnership’s Principal Prateek Jain revealing a drop from 110 in 2022 to 72 as of November 2023.
Segment-wise valuation trends painted a nuanced picture, as detailed by Jaspreet Sethi, CEO of consulting firm HexGn. Health and medtech segments experienced an 8 percent valuation decline, while e-tail and fintech sectors faced declines of 9 percent and 2 percent, respectively.
However, amidst these challenges, Indian Startups focusing on sustainable business models, artificial intelligence, Software-as-a-Service (SaaS), deep tech, fintech, electric vehicles, and casual gaming continued to exhibit promise, signaling potential avenues for growth.
SoftBank Group, a significant investor in India’s startup ecosystem, observed a positive trajectory, citing successful exits and strong operating performances among its portfolio companies. Narendra Rathi, Investment Director at SoftBank Investment Advisers, highlighted the maturation of companies and their ability to attract external capital as a testament to their growth.
Looking ahead to 2024, investors foresee an exciting yet challenging landscape. They anticipate increased IPO activity, particularly in sectors like local consumption, fintech, enterprise SaaS, and infrastructure. This sentiment was echoed by Lightspeed’s Taneja, who emphasized the likelihood of more IPOs and the continued dominance of core themes in deal flow.
The fintech sector notably saw milestones such as Mobikwik and Meesho reporting their first-ever profits, while PhonePe, India’s largest fintech firm, raised USD 850 million at a pre-money valuation of USD 12 billion.
This growth trajectory in fintech was also buoyed by the vacuum created by the crackdown on Chinese loan apps, paving the way for Indian firms to fill the space and expand their presence in the market.
As India’s startup ecosystem navigates through challenges, the outlook remains cautiously optimistic, hinging on the resilience and adaptability of startups to overcome hurdles and chart a path towards sustainable growth.
