Startups set for a strong year despite global headwinds

If there was one thing India’s startup ecosystem learnt in 2022, it was that the sky-high valuations and big-ticket fundings of 2021 were things of the past and possibly an aberration. It was evident in the fact that 2022 saw only 21 companies turn unicorns, less than half (44) of the startups that achieved a billion-dollar valuation in 2021.

Although 2023 might not see a repeat of the exaggerated valuations and insane fundings of 2021, industry watchers said that the Indian startup ecosystem is well-placed in the global economy.

Despite the ongoing headwinds that the global markets continue to face in the form of uncertain geo-political situations in Ukraine and the resurgence of Covid infections, the current situation is far better than what the world saw in 2008, said Anirudh A Damani, Managing Partner, Artha Venture Fund.

Millions of job cuts were happening every week in the US. Today, the banks are extremely strong and well-capitalised, Damani said.

“Barring something absolutely catastrophic happening like the Russia-Ukraine war turning nuclear, I am fairly clear of a record amount of money coming into India in 2023,” he added.

The unfavourable market conditions in 2022 made many startups shelve their IPO and fundraising plans due to low valuations. As a result, funds raised by Indian startups across seed, early and late stages in 2022 dropped 43% to $14.76 billion, as per data from Crunchbase, a US-based research platform tracking private companies.

However, industry watchers felt that this was required to bring back some sanity to India’s burgeoning new-age economy that is expected to contribute 4-5% to its gross domestic product in the next two to three years.

“Sanity has come back to the markets,” said Fireside Ventures Principal Prayag Mohanty.

While experts predicted the flow of funds to get better gradually in 2023, they expected it to stay slow for some more time.

“The funding scenario may continue to remain tight in the short term but ease out eventually,” said Deloitte India Partner Jatin Kanabar.

Investors, however, told DH that they were raring to fund startups with strong fundamentals.

There will be a lot more focus on investing in those startups with profitability or a path to profitability, Mohanty said. “Good companies are still getting funded and this is good for the ecosystem,” he added.

Others agreed.

“In the current market cycle, investors will be investing in capital-efficient and sustainable businesses that focus on unit economics,” said Unicorn India Ventures Managing Partner Anil Joshi. There is capital available for good and fundamentally strong businesses in the markets, added Joshi.

Sectors to bet on

Accounting for 19 unicorns out of India’s 102, fintech remains the favourite sector for investors and is expected to continue performing well in 2023, too. “Fintech also has a huge opportunity. The government is serious since they want credit to flow through the economy,” said Damani.

Startup founders too pointed out the government initiatives.

“This growth (of the fintech sector) has been underpinned by numerous factors including key initiatives taken by the government to aid the expansion of fintech companies into new markets,” said Nirav Choksi, chief executive officer and co-founder of CredAble, a working capital tech provider.

Amid the burgeoning digitisation drive in the country, a lot of startups, over the last few years, have taken to digitised lending. This has blown up to become a key space to watch out for, said Choksi.

Investors felt the fintech space was still at a nascent stage and that there was more room for growth in this segment.

“Six crore credit cards in 140 crore population is not even a drop in the bucket. I think there is a lot of money that will be flowing into the fintech enabler ecosystem - like how do you enable loans,” said Damani.

Besides the fintech and software-as-a-service (SaaS) segments, which together contribute 36 out of India’s 102 startups, investors are also optimistic about certain newer sectors.

“In the next couple of years, we may see more action in the space of edtech, health-tech, deep-tech, agritech and media/entertainment,” said Deloitte’s Kanabar.

Investors agreed.

Considering that the world is going through challenges, agri-tech and medi-tech are also likely to do well, said Joshi.

Advancements in tech and increasing digital adoption will change the way healthcare is offered in India in days to come, said health-tech startup Practo co-founder Siddhartha Nihalani.

“With innovative and tech-enabled solutions, disruptions by health-tech startups, the future of healthcare is very bright in India,” said Nihalani.