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Why 2023 was a difficult year for Indian start-ups, and why 2024 too looks challenging

Context- In 2021, India’s start-up ecosystem flourished, positioning the country as a reliable center for successful business development. However, 2023 presented a more restrained picture. The year 2024 might witness entrepreneurs prioritizing key metrics like enhancing profits and minimizing expenditure. Despite this, investors are of the opinion that the funding environment may not experience the same momentum as it did in 2021.

First, how was 2023 for Indian start-ups?

  • In the previous year, Indian start-ups accumulated a total of $8.3 billion, marking the lowest fundraising since 2016 when there were significantly fewer such companies.
  • The compound annual growth rate (CAGR) of funding for these start-ups also witnessed a 72% drop over the past three years, indicating the end of the venture capital boom that was triggered by the Covid-19 pandemic.
  • In 2022, India saw the emergence of 23 unicorns, a term used for private businesses valued over $1 billion. However, in 2023, only two companies managed to achieve this status. Furthermore, over 20,000 employees in various start-ups were laid off in 2023.
  • According to a report by Nasscom and Zinnov, tech start-up founders identified cash flow problems, availability of funding, and low customer demand as the primary challenges in 2023. Simultaneously, several companies emerged, hoping to capitalize on the ongoing wave of generative artificial intelligence (AI), a trend that could gain more momentum in 2024 as AI becomes increasingly mainstream.
  • In summary, while the Indian start-up ecosystem experienced a slowdown in 2023 with reduced funding and job losses, the potential for growth remains, particularly with the increasing focus on AI technologies.

Where was the impact of the decline in fundraising the most?

  • In 2023, older firms faced significant challenges due to a sharp decline in fundraising, particularly impacting late-stage investments which fell to 29% of the 2022 levels, as per the Nasscom-Zinnov report.
  • This decline was mainly due to valuation cuts and investors shifting their focus towards profitability, resulting in a substantial drop in mega deal rounds from 42 in 2022 to just 12 in 2023.
  • As funding became a struggle and several start-ups compromised on corporate governance, investors turned more cautious, affecting upcoming businesses that rely on initial funding to streamline their operations and develop market strategies.
  • Seed-stage funding also faced difficulties in 2023, with Indian start-ups raising only $700 million compared to $1.2 billion in 2022.
  • In summary, 2023 was a challenging year for start-ups, particularly for older firms and those at the seed stage, due to a significant reduction in funding.

Were there any sectors in which start-ups did better?

  • In 2023, funding for Indian automotive tech start-ups grew by 16%, leading to a 4.5X increase in the sector’s share of total funding compared to 2022. Mega-deal value also saw a 57% increase in 2023 over 2020, primarily involving funding raised by Electric Vehicle (EV) manufacturers.
  • Start-ups in the supply chain and logistics sector saw a rise in deal value, driven by funding raised by unicorns or near-unicorns. Investors are optimistic about the growth of the Open Network for Digital Commerce (ONDC) ecosystem, which is expected to boost start-ups in the logistics space.
  • Despite 2023 being a challenging year for tech start-ups, nearly 60% of start-up founders reported an increase in revenue and profitability, indicating a shift towards business fundamentals. Additionally, over 100 generative AI start-ups are now active in India’s start-up ecosystem, developing both horizontal and vertical applications.

How did India compare with the world in the start-up ecosystem?

  • In 2023, India ranked fourth in terms of fundraising by businesses, trailing the United States ($113 billion), the United Kingdom ($17 billion), and China ($9.6 billion), according to a report by Tracxn.
  • During the same year, 18 Indian start-ups, including Honana Consumer Limited (parent company of Mamaearth) and drone manufacturer ideaForge, went public. In comparison, the US and China each saw 34 start-ups going public.

Conclusion- Looking ahead, the Indian start-up ecosystem is poised for a transformative journey. Despite the challenges faced in 2023, the resilience shown by start-ups, particularly in sectors like automotive tech and AI, signals a promising future. The focus should now be on strengthening the fundamentals of businesses, with an emphasis on profitability and sustainable growth. This could involve adopting innovative technologies, improving operational efficiencies, and exploring new market opportunities.

Furthermore, the government and regulatory bodies could consider implementing policies that foster a conducive environment for start-ups. This could include tax incentives, easing regulatory norms, and promoting domestic and foreign investments.

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