Investors also recognised the necessity for a more active role in their portfolio companies. This involved providing support for growth decisions and exercising supervision over corporate governance. In essence, founders and investors alike grasped the importance of a thoughtful and sustainable approach, acknowledging that a balanced strategy is essential for the long-term success of businesses in the dynamic ecosystem.
Over the last five years, we’ve grown accustomed to receiving positive, record-breaking news. However, 2023 marked a departure with a record of a different kind. Startups in the country raised a mere $7 billion, the lowest amount in the past five years. This decline is primarily attributed to a substantial drop in late-stage funding, plummeting from $15.6 billion in 2022 to just $4.6 billion in 2023.
The numerous governance and performance issues in the poster-child startups of the country, coupled with a global capital slowdown, indicators of global recessions, and post-COVID market corrections, did not bode well for India’s otherwise burgeoning startup ecosystem.
Even though funding dropped in 2023, some of the larger companies with cash reserves were able to acquire struggling products/companies at reasonable prices, resulting in over 120 acquisitions for the year. While this figure is lower than in 2022, it indicates positive signs of the trust that players from different sectors are placing in remaining India-centric in the long run. A small indicator of this trend was also evident in the exits that VC funds were able to secure in 2023, amounting to $3.46 billion across 79 deals.
The statistics indicate that 2023 served as a much-needed reset for the ecosystem, enabling investors to re-strategise and founders to become more resilient. In addition to re-strategizing, funds have spent 2023 raising new capital to build a reserve of cash for disbursement over the next 3-5 years, further bolstering belief in India’s innovation and wealth generation capabilities among domestic and foreign investors. A total of 63 funds have raised over $5 billion, focusing exclusively on India, with 29 of these funds maintaining a clear focus on the early-stage ecosystem. The slowdown last year was not alleviated by the fact that funds consistently attempted early entries, with just under $2 billion raised by early-stage startups (Seed to Series A), compared to $5.4 billion in 2022. However, the outlook for early-stage startups appears quite positive from 2024 onwards, supported by high-innovation sectors such as BioTech, Specialty Chemicals, HealthTech, and DeepTech. This optimism is further reinforced by the emergence of new early-stage-focused funds and the revised strategies of growth-stage funds, which now include opportunistic early-stage investments.2024: Providing hope
Government Expectations: Although the budget in 2023 did not significantly impact the startup ecosystem, the government took a series of steps to promote startups in India. Initiatives such as the Fund of Funds for Startups (FFS) scheme, Startup India Seed Fund Scheme (SISFS), and Credit Guarantee Scheme for Startups (CGSS) were implemented under the Startup India initiative to provide capital at various stages of a startup’s business cycle. The Central Government announced several measures, including tax concessions for startups, customs duty exemptions for EV-related capital goods and machinery, and the Drone Shakti Program. Additionally, the government supported agriculture-based startups by establishing the Agriculture Accelerator Fund, aimed at bringing affordable solutions to farmers’ challenges.
With elections scheduled for 2025, I don’t anticipate this budget to bring about significant changes for the startup ecosystem. Reports over the last couple of weeks indicate the government’s inclination towards strengthening the DeepTech ecosystem, and we can expect the formation of some incubators/government funds for the same in 2024.
Founder Expectations: The theme of resilience is not expected to change anytime soon, as investors will likely remain cautious for the better part of the year. In my opinion, founders simply need to keep their heads down, establish two goals – one for the next 12 months and the other for the next 36 months – and back-calculate their actions accordingly. Startup funding is unlikely to be as uncertain as it was in 2023 and should gain momentum in the second half of 2024, as newer funds need to justify their investment timelines and drawdown commitments.
Downturns, like the one experienced in 2023, are a vital aspect of the economic cycle, and we typically associate such periods with success stories for the next decade. The overall growth trajectory of the Indian economy, and as a sub-function, the startup ecosystem, appears extremely positive over the next two decades. It’s time to acknowledge and learn from the challenges of 2023, and evolve as an ecosystem.
The author is CFO and Partner, Aeravti Ventures.
