Chai stalls to unicorns: Revolution brewing in startups as funding winter dissipates

Fog on investments dissipating: India's vibrant and resilient startup ecosystem has weathered many storms in the last few years. The recent one was funding winter as the funds for the ecosystem declined by a whopping 72 per cent to $7 billion in 2023, as per the data intelligence platform Tracxn.  After braving many storms, there is a piece of good news for the sector as the prolonged funding winter for startups is slowly dissipating owing to a resilient spirit of innovation and support from policymakers.
 

India has over one lakh startups recognised by the government. As per official data, the Department for Promotion of Industry and Internal Trade (DPIIT) has recognised 92,683 entities as startups as on 28th February 2023. The number presently is over 1.14 lakhs.

Notably, the number has doubled year-on-year since the launch of Startup India initiative in 2016. Startups saw a 207 per cent jump in 2022, with 26,542 startups recognised by the government in contrast to 8,635 startups recognised in 2018.

Celebrating grassroots innovation

Veer Mishra, founder of jewellery savings app Plus feels the day is for celebrating innovation in legacy as well as grassroot business forays.

"From chai stalls to unicorns, India's startup spirit is brewing a revolution. Celebrating National Startup Day is not just about applauding past giants, but igniting new sparks in every village, college, and garage.”

The startup ecosystem in India was marred by a ‘winter wave’ from 2022, but is now seeing an uptick after a season of layoffs and scarce funding.

A Startup20 summit was also part of the G20 Summit in July last year, highlighting the importance of the emerging startup ecosystem in India. But governance issues, slower funding flow in late-stage startups and rampant layoffs in the ecosystem dwindled the perception, and acted as a deceleration.

Resilient Growth

Vikram Gupta, Founder and Managing Partner, IvyCap Ventures said a substantial boost in liquidity and valuations is expected in late-stage startups.

“After overcoming the challenges of 2023, resilient startups are well-positioned for success. Anticipating political stability and policy continuity from the upcoming elections, a substantial boost in liquidity and valuations is expected, addressing funding gaps, particularly in late-stage funding (Series B, C, and D),” he said.

The outlook for 2024 includes a hopeful increase in FDI, with promising sectors for investment encompassing healthtech, generative AI, fintech, B2B SaaS, and late Series opportunities in the consumer sector. With numerous IPOs in preparation, the startup ecosystem appears optimistic for the year ahead, Gupta added.

The onset of the cold wave in the Northern part of the country presents a stark contrast to the receding funding winter in India’s startup ecosystem, according to Rahul Gupta, Founder and Managing Partner of venture debt fund ValuAble.

“Despite a drastic drop in funding numbers, the past year saw a shift in strategy, with existing and new funds raising fresh capital for to the tune of 5 billion, leading to a surplus of $20 billion lying ready for deployment in the early-stage ecosystem,” he said.

Amid the dip in equity funding across all three stages – seed, growth and late, the demand for venture debt funding has gone up tremendously to $1.2billion, he added.

Policy Play and New Categories

Shashank Randev of 100X.VC said the heartbeat of Indian innovation echoes the resounding potential of startups, with the ability to disrupt and offer transformative solutions for the vast market.

“Just as data fuels the engine of progress, in the last decade alone - Indian startups have burgeoned, creating new category leaders in an untapped market with Freshworks, Swiggy, Paytm, Veeba, Nykaa and so on,” he said.

Notably, several venture capitalists have turned investors to support the ecosystem.

Shreedha Singh, Founder and CEO, TAC- The Ayurveda Co, who is also an angel investor on Jio Cinema’s Indian Angels feels the youth and government is taking charge of fostering a conductive environment for innovation.

“The increasing role of the youth and the government in taking charge and fostering a conducive environment for innovation… is crucial in nurturing a new generation of entrepreneurs and turning startups into engines of economic growth and job creation,” she said.

Our startups are not just local success stories; they are setting global benchmarks, she added.

The Highs and the Lows

Fintech is holding the pulse of investors in terms of startup investments for 2024, with the Reserve Bank of India paving way for onboarding merchants on Business-to-Business fintech enablers Razorpay, Cashfree Payments, Paymate, EnKash among others.

Nitya Sharma, founder and CEO of checkout network Simpl said, "In the era of the unbundling of e-commerce, startups play a vital role in creating a level playing field and bringing market access to millions for small businesses led by MSMEs and D2C merchants in the country."

The National Startup Day should set the tone for the growth of this ecosystem over the next 10 years where governments, industry and the academia pool their knowledge and resources for a digital-first nation, she added.

Anand Agrawal, Co-Founder and CPTO of debt collection and resolution platform Credgenics said the startup ecosystem is primed for a positive resurgence in 2024 despite a challenging 2023.

“Anticipated advancements in technology, increased investment opportunities, and a global economic recovery are likely to contribute to a more optimistic outlook," he said.

Challenges and Pivots

Startups in emerging categories like gaming saw policy regulations impact services, and employability. But resilience in the sector has paved way for pivots.

Ashwin Suresh, founder of homegrown game streaming platform Loco said the industry's forward-looking approach, coupled with a commitment to staying at the forefront of technological advancements, sets the stage for sustained success, making India a key player in the global gaming arena.

Sudeep Kulkarni, founder of Game Theory said startups suffered from unrealistic expectations that trends of 2021 and 2022 would continue in 2023 which didn’t happen.

“The milestones got more detailed and focused and the mindless hiring in the hope of accessing more capital in 2023 suffered. The businesses had to relook at their burn rates and monitor their cash runway closely and the startups that did this managed to not just survive but also raise additional capital for the realigned growth goals.”

The present year is interesting in proving some of the business cases, he added.