Sustainability and profitability the key to startup fundraising in 2024

Bengaluru: 2023 has been one of the worst for India’s startup ecosystem for funding in the past 5 years, with investments down 72 per cent between January-November this year to just $7 billion, compared to $25 billion in the previous year, as per data by Tracxn. There were just two unicorns this year, compared to 23 in 2022.

A number of macroeconomic factors influenced this decline, but so did corporate governance issues, unrealistic expectations from founders and maturity within the investment community.

While the outlook for the new year remains generally more positive, what is expected to drive investment strategies is venture capital and private equity investors moving from FOMO-driven decisions to focusing on companies that show a scalable, sustainable and profitable business model, experts DH talked to said.

“We are transitioning from one cycle to another. The last cycle in technology was more financial as funding dried up which had a damping impact on valuations. It started from the IPO and pre-IPO market, and then trickled down to early stage markets as well. But the bottoming process is finished now,” said Vikram Chachra, founding partner at 8i Ventures.

He added that investors that were earlier ready to overpay are now underpaying to some extent. But now, the industry is moving towards equilibrium between founders and investors in the next two quarters

Investors believe that due to the market environment and a sudden influx of capital in 2020 to 2022, founders had begun to demand very high valuations regardless of how sound their business models were or if they were turning any profits. VCs were playing along due to a fear that they will miss out on a good company or fall behind their peers, but this stopped being the case as interest rates grew, making lower valuations the norm and swinging the pendulum on the side of the investors.

Due to the reduced deal amounts and sizes, there is a lot of dry powder left with investors. While this may lead to bigger funding in the coming quarters, investors are expected to get more hawk eyed for profitability and sound financial metrics, areas which were previously neglected over metrics like subscriber count and customer satisfaction in a growth at all costs environment.

Moreover, the quality of founders and mid-to-senior level leadership will also play a part in VCs signing cheques they up the ante on diligence, both corporate and financial, even at the seed-stage, according to Mitesh Shah, cofounder of Inflection Point Ventures.

“In the previous year, we saw the deal cycle getting longer. Earlier it was 2 months, now it is 4-6 months, because investors were evaluating multiple companies at once and undergoing deep diligence. This is expected to normalise in 2024,” Shah said. VCs have also become more disciplined and there is open dialogue and feedback, turning the deal making process more mature, he added.

Nonetheless, the sectors that stood out last year are expected to continue receiving traction in 2024, according to Neha Singh, founder at Traxcn. These include deeptech and companies in the electric mobility ecosystem.

A growing number of spacetech companies also received interest from investors, while enterprise tech and fintech continued their stronghold. Since India is becoming a formidable consumer market and manufacturing hub, these sectors are expected to continue garnering investments, Singh said.

“There is a good amount of positivity emerging for 2024 indicated from public market euphoria which we saw in October-December. The overall environment is buoyant. In November and December only, a number of middle and late stage deals started materialising and more are expected as VCs return from the holidays,” according to Shah.