Indian start-ups

Context: Funding slowed, jobs were lost, and only 2 unicorns were created in 2023. A number of firms cropped up hoping to ride the ongoing generative AI wave.

Background:

• Indian start-ups experienced a significant drop in funding, reaching $8.3 billion in the past year, marking the lowest since 2016.
• The compound annual growth rate (CAGR) of funding in the last three years witnessed a substantial 72% decline, signaling the end of the venture capital-fueled boom that followed the Covid-19 pandemic.
• In 2022, India added 23 unicorns, but this number plummeted in 2023, with only two start-ups achieving unicorn status.
• More than 20,000 employees across various start-ups faced job losses in 2023, indicating challenges within the ecosystem.
• According to a report by Nasscom and Zinnov, tech start-up founders highlighted cashflow issues, funding availability, and low customer demand as their primary challenges in 2023.
• Despite the challenges, a new trend emerged with the rise of firms focusing on generative artificial intelligence (AI), anticipating increased traction in 2024 as AI continues to become more mainstream.

Which firms were impacted by fundraising issues:

• Older firms faced greater challenges amidst the sharp decline in fundraising in 2023.
• Mega deal rounds saw a significant drop from 42 in 2022 to only 12 in 2023.
• Funds struggled, prompting caution among investors who became more discerning with their investments in emerging businesses.
• Start-ups cutting corners on corporate governance added to investor hesitancy.
• Initial funding, crucial for young start-ups in streamlining processes and devising go-to-market strategies, became more elusive.
• Seed-stage funding witnessed a notable struggle in 2023, with only $700 million raised compared to $1.2 billion in 2022.

Sectors in which startups did better in 2023:

• Some sectors outperformed in 2023, with a 16% growth in funding observed in Indian automotive tech start-ups.The automotive tech sector's share of total funding saw a significant 4.5X increase compared to 2022.
• Supply chain and logistics start-ups experienced a surge in deal value, driven by funding from unicorns or nearly-unicorns.
• Investors showed confidence in the growth potential of the Open Network for Digital Commerce (ONDC) ecosystem, anticipating positive impacts on logistics start-ups.
• Despite the challenges in 2023, tech start-ups prioritized business fundamentals, with nearly 60% of founders reporting increased revenue and profitability.
• India's start-up ecosystem saw over 100 active generative AI start-ups, focusing on both horizontal and vertical applications.

Comparison of Indian startups with other countries

• India ranks third in the world in terms of the number of startups, after the United States and China.
• In 2023, India was fourth on the list of countries where businesses raised money, after the United States, the United Kingdom, and China.
• In 2023, 18 start-ups hit the bourses in India, including Honana Consumer Limited, the parent company of beauty and wellness brand Mamaearth, and drone manufacturer ideaForge.
• In the US and China, 34 start-ups each went public in 2023.
• India has strengths in IT and biotech, which bode well for the country’s entrepreneurial prospects.
• The Indian government has launched the “Startup India” initiative in 2016 to encourage entrepreneurship.
• The Indian startup ecosystem is expected to witness YoY growth of a consistent annual growth of 12-15%.

Potential Solutions:

• Diversifying Funding Sources: Startups should explore government-backed initiatives, crowdfunding, and strategic partnerships in addition to traditional venture capital and angel investors
• Staying Informed and Proactive: Startups must stay informed about the latest regulations, establish a proactive relationship with legal experts, and engage with government bodies to contribute to the regulatory framework.
• Building Strong Customer Relationships: To overcome a lack of market understanding, startups can focus on building strong customer relationships.