Valuations deflated, VCs shy: Startups pivot towards pragmatism

startups, PE VC funding
In the absence of easy money, Indian startups ditch quick thrills for long-term growth, honing efficiency and chasing profitability.

Indian companies and startups are witnessing a decline in allure, evidenced by a 41% drop in private equity and venture capital investments this calendar year. Indian firms have garnered $27.89 billion across 697 deals in 2023 so far, a fall from the $47.62 billion raised in 1,364 deals last year. Additionally, PE exits have seen a slight uptick, reaching $19.34 billion from 248 companies, compared with 233 exits worth $18.48 billion in 2022. This funding downturn in India reflects a challenging environment for startups, with VC funding dipping to a six-year low in November.

The fall in deal volumes indicates a shift by investors towards more selective, high-impact investments. This trend may also suggest improved efficiency in decision-making, with a focus on long-term value and sustainability. In contrast, 2021 experienced an extraordinary surge in startup capital, with $42 billion raised, but the market has since become saturated, leading to a slowdown in investment activity. According to the Indian Venture Capital Association, VC exits rose from $3.09 billion over 113 deals in 2022 to $3.46 billion from 79 deals in 2023.

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While the shift towards more selective investments may seem bad omen for some startups, it presents a crucial opportunity for deeper collaboration between investors and founders. Investors with a long-term view can offer valuable mentorship and strategic guidance beyond just capital, helping startups refine their business models and build sustainable foundations. This level of engagement can foster more resilient and impactful businesses ultimately better positioned to navigate future market fluctuations.

The current year has been a challenging one for India’s startup ecosystem, marked by a 65.8% fall in funding from January to November. Factors such as inflation, rising interest rates, geopolitical tensions, and recession fears have impacted funding. Globally, venture funding reached a record low in 2023.

GlobalData reports that Indian startups raised $6.9 billion across 1,013 VC deals in the last 11 months, a significant decrease from $20.2 billion in the same period last year. This decline is attributed to inflated valuations, with startups now needing to present credible plans for return on investment, as high valuations alone no longer attract fund managers. The entire funding ecosystem is undergoing a reset.

With the funding slowdown, layoffs have spiked among startups. Companies like Paytm, Byju’s, JioMart, and Swiggy have collectively laid off thousands of employees, as have other tech firms like Milkbasket, Skill Lync, 1K Kirana, ShareChat, Adda247, MPL, Spinny, WayCool, Meesho, Dunzo, Pristyn Care, and Ola.

However, 2024 is viewed with optimism. Industry experts believe the Indian startup ecosystem remains robust, supported by government initiatives and a shift towards sustainable, long-term growth. These initiatives include the Fund of Funds for Startups, the Startup India Seed Fund Scheme, and the Credit Guarantee Scheme for Startups.

The current reset holds a valuable lesson for the entire startup ecosystem. The focus should not be solely on chasing inflated valuations but on building businesses with genuine value propositions, robust fundamentals, and clear paths to profitability. Investors and founders alike must prioritise long-term growth and sustainability over short-term gains. This shift in mindset can create a more balanced and healthy ecosystem, ready to thrive beyond the current slowdown.

Despite the year’s macroeconomic and geopolitical challenges, analysts are hopeful for a turnaround in 2024, fueled by favourable government policies, India’s strong and growing economy, and ongoing infrastructure development. Startups that have weathered the past 18 months are expected to thrive in the coming year.

The current period presents an opportunity for businesses focusing on customer and revenue growth over mere capital raising. As of March 2023, Indian PE and VC firms hold a record $16 billion in dry powder, according to Preqin. This optimistic outlook suggests a potential resurgence in startup investments, although venture activity is unlikely to match the heights of 2021–22 due to recent market corrections.

The startup ecosystem will be defined by pragmatic innovation and an increase in tech startups moving towards Initial Public Offerings. Startups must strategically pivot, emphasising resilience, sustainability, and operational efficiency to navigate the challenges and uncertainties affecting investor confidence. Experts also advise adopting leaner business models and optimising cloud resources for cost-effectiveness.