Indian startups: Year of resilience, strategic shifts, lessons learned

The investors exhibited a discerning and cautious approach, in sharp contrast to the previous years' exuberance. This shift in investor sentiment highlighted the importance of sustainable business models and profitability over rapid, unsustainable growth. As a result, startups with strong fundamentals and clear paths to profitability attracted substantial investments, while others encountered difficulties securing capital.

Funding issues

The funding landscape underwent a significant transformation in 2023, with a substantial decrease in total funding, plummeting from $25.8 billion to $7.0 billion, representing a 72 per cent decline. The number of funding rounds also experienced a notable drop, decreasing from 2,763 to 1,000, reflecting a 63 per cent decrease. Series A+ funding rounds saw a 67 per cent reduction, from 882 to 283. The emergence of new unicorns dwindled drastically, with only two new unicorns emerging in 2023, as opposed to 23 in the preceding year, marking a 91 per cent decline, according to a report from Tracxn, a startup data platform.

These figures highlight a pronounced shift in the investment climate, focusing on quality investments, sustainable growth and a preference for startups with clear paths to profitability. “In 2023, it became clear that funding would primarily go to startups prioritising profitability. Money isn't readily available for innovative ideas unless they show a clear path to making money,” Aman Dhall, angel investor, told The Federal.

Emerging domains

One notable trend in 2023 was the emergence of specific sectors such as HealthTech, EdTech and FinTech. The increasing digital adoption across India fuelled this surge. Healthcare startups, in particular, garnered significant attention, responding to the growing demand for healthcare innovation in a post-pandemic era. Integrating AI, machine learning and IoT technologies was pivotal in delivering innovative solutions across various sectors, signalling a broader shift towards a technology-centric startup ecosystem.

In 2023, Indian startups faced a myriad of challenges, including uncertainties in the global economic landscape, heightened competition in the domestic market, and the imperative to retain top talent. Effectively navigating these challenges necessitated strategic planning, operational efficiency, and, in some cases, pivoting of business models.

Profitability factor

“In 2023, startups pivoted from the exuberance of 2022, emphasizing the importance of solidifying business models and pursuing profitability over rapid expansion. This shift underscored the significance of strategic planning, innovation and fiscal prudence. As we venture into 2024, vigilance is paramount. Startups must remain attuned to global shifts, economic indicators and market dynamics. Adaptability, resilience and astute financial planning will be the linchpins for startups seeking to thrive amidst the evolving landscape of 2024,” Atul Monga, CEO and Co-Founder of Basic Home Loan, said.

Despite these challenges, several startups thrived in 2023, exemplifying innovative solutions, market acumen and sustainable business models. However, not all startups experienced success in 2023. Some grappled with significant challenges and struggled to maintain their operations. For example, an e-commerce startup faltered due to logistical issues and the inability to compete with established players.

Lessons from Byju's

One of the most noteworthy lessons from 2023 was derived from Byju’s, a major player in the EdTech sector, which was unable to raise additional funds and faced regulatory issues. Byju's aggressive domestic and international expansion strained its finances. It also faced criticism for not declaring its financial results on time.

The company, once a decacorn (valuations exceeding $10 billion), has been sacking hundreds of employees and is trying to sell off its subsidiaries to stay afloat. Its overreliance on external funding without a clear path to profitability posed risks, as evidenced by its experiences. Striking a balance between investment and revenue generation is pivotal for long-term sustainability.

Online gaming

The online gaming industry, worth $1.5 billion, received a huge setback after the GST Council imposed a 28 per cent GST on the total prize pool and platform charges. This could potentially lead to several startups closing down as the industry believes that a 28 per cent levy will leave them with no room for growth. "With the low-profit margins, such non-standardisation of tax implications at the global level could potentially lead to a significant shift of consumers towards offshore platforms or even illicit gaming and betting platforms," Krishan Arora, a partner at Grant Thornton, wrote in an article.

As we look to the future, innovation will continue to be the driving force for Indian startups. Embracing cutting-edge technologies, crafting unique business models and addressing intricate local challenges will remain paramount for growth and societal impact.

Global markets

“In 2024, the emphasis on profitability will continue. Businesses planning for the future and prioritising profits from the beginning will be more likely to secure funding. Additionally, there will be increased attention on compliance, with businesses being closely monitored and evaluated,” said Aman Dhall, an angel investor.

Indian startups are increasingly venturing into international markets, seeking opportunities to tap into global customer bases. This trend is poised to foster cross-border collaborations and knowledge sharing. Moreover, sustainability and social responsibility are transcending buzzwords, becoming integral aspects of business operations.

One of the biggest takeaways from 2023 is that the previous model of growing revenues at any cost is no longer sustainable. Investors expect startups to run their businesses like corporates do, focusing on profitability, long-term growth, innovation, transparency and a customer-centric approach.