The Indian startup ecosystem continues to see a funding crunch. Due to the uncertainties brought on by rising inflation, regulatory changes, funding winter, increasing international interest rates, the looming recession in the West, and the conflict in Europe that has disrupted supply chains, investors have been reluctant to invest in Indian businesses.
According to market intelligence platform Tracxn, the total equity funding in the tech space was $2.8 billion in the first quarter of 2023 (Jan-March), which plummeted more than 75 per cent as compared to $12.1 billion in the same quarter in 2022. The number of total equity funding rounds decreased by 63 per cent YoY to 298 in Q12023 from 808 in Q12022.
When asked about future funding in startups, Milan Sharma, founder of 35 North Ventures, a Mumbai-based venture capital firm commented, “The companies that are not burning cash and have robust business models and their promoters focus is mainly on profitability, money will flow to those companies.”
“The decline in funding may lead to a shift in focus towards profitability and sustainable growth, and investors may prioritise companies with a proven business model, strong fundamentals, and a clear path to profitability. However companies may also need to optimise their cost structures, improve operational efficiency, and focus on customer satisfaction to attract investment,” commented Prashant Narang, co-founder at Agility Ventures, an early-stage investment firm.
According to Narang, “The word ‘Proficorn’ was recently coined, because more and more investors are looking at profit-making or even companies which are at a break-even point. Companies with a proven business model, sustained growth, and innovative solutions are more likely to attract investment in the current scenario.
The sector that raised the most money in Q12023 was B2C (business to customer) e-commerce sector. The companies in this sector raised $2.7 billion and sectors like payments, fashion tech, internet, and B2C fashion e-commerce followed the trend. However, the Tracxn report revealed that last year in the same quarter, the maximum funding round was led by SaaS companies (software as a service) and enterprise software companies which had an equal amount of funding worth $2.4 billion each. Meanwhile, marketplace businesses raised $2.4 billion in the first three months of last year, making it the second top industry.
The B2C e-commerce companies include Amazon, Flipkart, FirstCry, Paytm Mall, Myntra, Snapdeal, 1mg, Pepperfry, BookMyShow, and Nykaa among many others.
While investors wait for values to rationalise, experts in the industry anticipate that the slowdown will persist, at least in the short term.
However, Vaibhav Totuka, co-founder of Qubit Capital says, “Investors are still investing as they have a lot of dry powder to invest but now they are more cautious and having deeper diligence towards a clear path to sustainability and profitability and not just burning money insanely. Investors’ focus will be more on profitability now,”
According to a recent study by PwC, business-to-consumer (B2C) were the fastest-growing companies to become unicorns while software-as-a-service (SaaS) sectors take approximately 10 years to reach the $1 billion valuation milestone.
SaaS industry has around 20 unicorns currently while fintech came second in the PwC’s CY22 Start-up Perspectives report.
“Some tech companies have already begun to shift their focus towards profitability, as evidenced by the recent wave of IPOs and acquisitions in the industry. In particular, companies in the software-as-a-service (SaaS) space have been working to improve their unit economics and reduce their customer acquisition costs to become profitable,” Nilesh Satpute, founder & CEO, Applied Cloud Computing.
Within the technology sector, areas such as software development, artificial intelligence, and blockchain have attracted significant interest from investors. Meanwhile, e-commerce companies in areas such as online retail, grocery delivery, and online travel booking have also been popular targets for funding, according to Satpute.