At Inc42, the last two months have either been about delving deeper into the year gone by or trying to take a peek into the trends that will shape the current year.
During this time, we also spent time speaking with several industry experts, who see the funding winter further seeping into 2024. Despite this, they see the current year faring better than the last, and there is a reason for it.
For starters, Indian investors are sitting on the dry powder of more than $18 Bn+. Then, we also need to understand more than one-third of investors couldn’t deploy even 50% of their allocated budget in startups since the onset of the funding winter in 2022, according to an Inc42 survey of 75+ Indian startup investors.
Consequently, 2023 saw funding in the Indian startup ecosystem reverting to 2017 levels. According to Inc42’s Indian Tech Startup Funding Report 2023, Indian startups secured just over $10 Bn in funding by December 25, registering a significant 60% decline from the $25 Bn raised in 2022.
Another key factor contributing to the scarcity of equity funding is persistent inflation in global markets, exacerbated by geopolitical tensions and an increasingly challenging global macroeconomic environment.
Despite India’s commendable 7.20% GDP growth rate, reaching a GDP of $3.3 Tn in 2023 and establishing itself as the world’s fifth-largest economy, the Indian economy remains closely linked to the global economy. This interconnectedness underscores the importance for startups to prepare for unforeseen challenges that may arise on the international stage.
Therefore, the current situation begs but one question — Will there be an uptick in startup funding in 2024? Let’s find out…
Investors To Remain Cautiously Optimistic
Speaking with inc42, Ashwin Raguraman, cofounder and partner at Bharat Innovation Fund, noted that the year 2024 presents a tug-of-war between the forces driving increased capital deployment and those constraining it. Despite a substantial amount of dry powder in the VC ecosystem awaiting deployment, the fear of recession continues to restrain fund managers.
Looking ahead (in the second half of the year), there are expectations that the forces impeding capital deployment will diminish, leading to a more vibrant investment landscape.
Anup Jain, an early stage investor and past managing partner at Orios venture partners, supported this perspective. He is of the view that the Indian startup ecosystem can easily absorb $25 Bn in funding on an annual basis across different stages ( Early, growth and late) given the rise in entrepreneurship, growth in the economy rapid scale-up potential as digitisation is now not a trend but mainstream as well as a vibrant IPO market capable of returning exits to investors.
Acknowledging India’s growth momentum, Jain emphasises the evolving maturity in the investor ecosystem with the rise of new VC firms with managers with a successful track record of returns and governance as well as founders handling their capital more judiciously and anticipates a step jump in investments in 2024 post general elections.
As per Inc42 analysis, overall YoY increase of approximately 36% in Indian startup funding for 2024. This forecast is based on the average annual growth rate of funding amounts from 2014 to 2023, encompassing the ups and downs of the Indian startup ecosystem over the past nine years.
Early Stage Startups To Witness Funding Uptick
The year 2024 is poised to mark the commencement of a new disruptive cycle, with a shift towards challenging the disruptors themselves rather than the traditional players. Established startups that have successfully scaled over the past 10-12 years will now face competition from emerging ventures adopting innovative strategies and business models.
Furthermore, significant momentum in the startup landscape has been observed, particularly with the establishment of GIFT City in Gujarat. Additionally, heightened government regulations and initiatives have been introduced to release transparent policies and guidelines, particularly in consumer-facing sectors such as fintech and gaming.
All these factors will likely push new ventures to rise in the Indian startup ecosystem, giving a significant lift to early stage funding and taking the same close to 2022 funding levels.
On the consumer front, the primary contributors are expected to be the middle-income segment, forming a more substantial base. Within various sectors, the rise of disruptive ideas and successful business models in new-age industries will drive an increase in early stage funding rounds.
Sectors likely to gain prominence or maintain the spotlight include manufacturing, agritech, climate sustainability, healthcare, unexplored areas in fintech, and anything related to accelerating enterprise digital transformation.
In healthcare, biotech has exhibited signs of a comeback, indicating a potential upswing, especially in a global context. The investment theme of deeptech is anticipated to strengthen further, with a continued focus on GenAI.
“What we anticipate emerging as a new theme from India is the materials space where innovations will create solutions across health, sustainability, and EVs, among other domains,” Raguraman said.
Growth Stage Startups Will Shine
In 2023, growth stage startups faced a tough time trying to balance making a profit and expansion. Investors were cautious and held onto their money tightly, making it challenging for startups to secure funding.
Despite having funds, investors struggled to find fundable startups with solid foundations. This made investors exercise caution in the year of the extended funding winter, 2023.
However, startups at Series A and Series B stages that successfully navigated these challenges showed strong growth.
Shashank Randev, founder VC and cofounder at 100X.VC, mentioned, “Every fund is now looking for the next batch of startups to support. This renewed interest will bring back confidence in the ecosystem. We’ve decided to invest $6.5 Mn in the next six months.”
Looking at the past five years, startups are now achieving significant growth, from zero to 10, within just two to three years. This rapid growth makes them attractive for investment in the growth stage.
Pre-IPO Rounds May Boost Late Stage Funding
While the domestic investor base in India is growing, many investors remain cautious, especially regarding higher ticket-size funding beyond Series C. The cautious stance of deep-pocketed international investors like Tiger Global and SoftBank in the Indian market has left late stage startups in a tough spot, grappling with a significant funding crunch.
However, a solution to this problem has emerged in the form of public listings. Even Small and Medium Enterprises (SMEs) are now conducting INR 1,000 Cr worth of IPOs, with the prerequisite being the company’s profitability. The extensive digitisation, covering both upper and middle segments, has expedited the success of companies in a shorter timeframe.
“We have witnessed the emergence of viable IPO templates in India, and in 2024, more Indian startups will approach IPOs, raising substantial pre-IPO rounds and turning around the late stage funding. The IPO pipeline already boasts 14-15 companies, and I wouldn’t be surprised if this number doubles,” founding partner at 3one4 Capital Pranav Pai said.
Many investors have emphasised that now is an opportune moment for the Indian startup ecosystem to reduce its reliance on late stage funding.
The historical scenario, where companies needed substantial time to scale and build profitable businesses, has evolved. Many predict that 2024 will witness a record number of profitable companies.
More Global Funds Setting Up Base In India
In the past two to three years, there has been a notable surge in domestic funds with an increasing influx of domestic capital into the Private Equity/Venture Capital (PE/VC) ecosystem. VCs are now anticipating a further increase in the establishment of bases by global funds in India in the upcoming years.
Most recently, MSA Novo, a multi-stage global venture capital fund announced a portfolio of six Indian startups, including companies such as MPL, Slice, Jar, Apps For Bharat, Flint, and Questbook.
Every sector in India presents an opportunity for technology-led innovation, emphasising that the potential to build in India for the global market has never been more evident.
As long as the focus remains on innovation, customer value, and sustainable growth, there is ample reason to celebrate. According to experts, this is the most opportune time to incorporate a company or fund in or from India.
Additionally, this trend is expected to create opportunities for global ultra-high net worth individuals (UHNIs) and family offices to enter the Indian markets as limited partners (LPs) and general partners (GPs).
Venture Debt: A Growing Avenue
In the world of venture capital contracts, venture debt in India is experiencing a slight increase. However, this growth is restrained by a more careful examination of investment opportunities.
According to Apoorva Sharma, managing partner at Stride Ventures, the average ticket size has significantly reduced from INR 45-50 Cr in 2021 to around INR 20 Cr. This adjustment reflects a strategic emphasis on supporting robust business models and steering clear of sectors entangled in regulatory challenges.
The venture debt landscape is transforming, with a strong focus on maintaining healthy asset quality and adopting a strategic approach that favours well-established category leaders. As the startup ecosystem matures, there is growing interest in venture debt, particularly in emerging sectors like electric vehicles (EVs) and companies with substantial capital needs.
Funding Sentiment Positive But Investors To Maintain Caution
Considering the impact of unforeseen global issues and other macro factors on the flip side, Inc42’s data analysis suggests a potential 5% reduction in funding.
Meanwhile, it is pertinent to note that investors will take more than usual to evaluate startups, demanding patience from founders.
“The last two years witnessed significant market volatilities due to wars impacting global economies, and 2024 will see major countries entering election mode. This implies that startups need to build robust risk mitigation strategies,” Padmaja Ruparel, cofounder of Indian Angel Network said.
Finally, as companies gain access to large pools of conscientious and responsible funding, it will become imperative for them to demonstrate and incorporate Environmental, Social, and Governance (ESG) frameworks within their businesses. Adapting to rapidly evolving technologies and prioritising stakeholder transparency will be pivotal for the creation of new frameworks, strategies and operations in 2024.
The post 9 Indian Tech Startup Funding Predictions For 2024 appeared first on Inc42 Media.
