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Tailwind Capital Advisers: Review and Outlook for Indian Startup Funding in 2023 and 2024

By Ms Deshna Jain, Managing Partner at Tailwind Capital Advisors

In the dynamic landscape of Indian startup funding, 2023 has been a year of challenges and adjustments. The once-soaring figures of the past years have taken a substantial hit, with funding plummeting to a five-year low of $7 billion, a stark contrast to the $25 billion recorded in the previous year. The sharp decline, nearly 73%, can be attributed to the global macroeconomic uncertainties fuelled by geopolitical tensions.

Decline in Funding and Investment Landscape

The Indian startup ecosystem, once ranked 4th globally in 2022 and 2021, slid to the 5th position in 2023. However, amidst this challenging backdrop, 20 Indian startups managed to secure $130 million in funding from December 4 to December 9.

Late-stage funding took the biggest hit, witnessing a staggering 73% drop to $4.2 billion from the $15.6 billion recorded in the same period in 2022. Early-stage funding closely followed with a 70% decline, and seed-stage funding saw a significant drop of 60% in 2023.

Top Funded Sectors in 2023

The funding landscape in 2023 showcases a varied performance across sectors. Fintech, a consistently strong performer, received $2.1 billion in funding, a drop from the $5.8 billion in the same period last year. The retail sector faced a 67% decline, securing a total of $1.9 billion. Enterprise Applications experienced a substantial 78% decrease, securing $1.56 billion in 2023. Environment Tech was an exception, seeing a 50% drop but with a notable 225% increase from 2021.

Leading Investors and New Unicorns

Investor activity in 2023 saw Let's Venture, Accel, and Blume Ventures as the top active investors. Noteworthy is the shift in investor priorities, with venture capitalists now emphasizing operational cash flows over growth. The creation of new unicorns saw a significant drop from 23 in 2022 to only two in 2023—Incred and Zepto. The cities of Bangalore, Mumbai, and Delhi-NCR remained the top-funded cities in India in 2023.

Challenges and Strategies for Startups

The drop in investment activity in 2023, reminiscent of the challenges faced in 2016, poses hurdles for companies navigating their growth stage. The closures of ventures like ZestMoney and Front row highlight the difficulties faced by models heavily reliant on capital injections.

To navigate these challenges, startups must pivot strategically and emphasize resilience, sustainability, and operational efficiency. The closures underscore the need for robust business models and operational effectiveness in this demanding environment.

Venture capitalists' shift towards prioritizing operational cash flows highlights the necessity for startups to focus on resilience and sustainability. The significant drop in the number of unicorns accentuates the need for startups to pivot strategically, emphasizing operational efficiency amidst uncertainties impacting investor confidence.

Outlook for 2024 and IPO Landscape

As startups face a prolonged squeeze in funding, the demand for better-governed firms with improving profitability becomes paramount. The IPO landscape for new-age technology companies has been underwhelming due to elevated valuations and a need for positive cash flows.

While 2023 posed challenges for the Indian startup ecosystem, strategic pivots towards operational efficiency, resilience, and sustainable growth can pave the way for success in the evolving landscape of 2024.

Therefore, the appetite for unicorn IPOs remains strong in India, provided they demonstrate profitability positive cash flows and scalability. The market retains a keen interest in firms that prioritize realistic valuations, right pricing, and a strong business model, vision & strategy.

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