How Startups Can Navigate The Market Downturn In 2023

On a global scale, India is poised to weather this winter far more easily as most top-tier funds in India have raised record funds this year, an indicator that we could see intense investment cycles ahead

India has recently emerged as the third largest startup ecosystem, closely following the economic titans — US & China. Though it might come across as a recent phenomenon, the seeds of this growth were planted almost four decades ago. 

It started in the 1980s when seven engineers founded tech giant Infosys with a meagre capital of $250. Young engineers who were enthusiastic about writing codes and wanted to make it big in the international market gave India’s first iconic startup story. Following their footsteps, other firms like TCS and Wipro further cemented the country’s prowess in the world economy. As a result, we now have an industry that employs 4.8 Mn people and is expected to touch $19.93 Bn by 2025. 

Then came the iconic 90’s, which witnessed the launch of Airtel, India’s largest telecommunication company that initially was an import enterprise dealing with generators, pivoted to manufacturing cordless phones, fax machines and other telecom gear. The decade was also instrumental in establishing strong banking models with banks like ICICI, Axis and HDFC, which are now considered among the top 10 banks of India.

The Story Now

Fast forward to today, India has seen a dramatic rise in both diversity and the number of startups. It has undoubtedly garnered significant attention due to the sheer volume of entrepreneurial ventures and the global funding movement. 

The nation now has a robust network of angel investors, and every significant venture capital or private equity company is keen to invest in the growth of India Inc. In a recent analysis, Indian unicorns, or startups worth $1 Bn or more, had a combined valuation of more than $340.79 Bn. The list will appear much more remarkable if you include the extensive names of “soonicorns” — companies poised to become unicorns soon. 

Even the pandemic couldn’t deter the country’s growth story for long. More specifically, in the last two years, many new businesses from varied industries have realigned their strategy to fit into the fast-changing scenario.

As per an industry report, Indian startups received a record investment of $38 Bn in 2021, with almost 84% of founders having a positive experience while raising the funding. This was coupled with the rise of 44 unicorns leading the year, beaming with growth, progress, and the ultimate evolution of the startup community. 

The data above indicates that 2021 was unquestionably a good year for the Indian startup ecosystem. Sectors, including fintech, edtech, SaaS, D2C, ecommerce, and logistics, among others, have performed remarkably well. 

However, there are now whispers of a funding winter gaining ground as the year 2023 approaches. Big-ticket acquisitions are becoming harder to find as investors seem hesitant to take risks.

Is The Funding Winter Coming For Indian Startups?

The game is changing now. After the blockbuster 2021, as we enter the age of high inflation, spiralling interests, unstable economies and political tensions, startup funding will embark on a snail’s pace. 

So does this mean that the Indian ‘Startup Story’ will soon become a relic of the past? Not really. Even though a funding crunch connotes a potential slowdown, it will require startups to apply a more pragmatic approach to ensure their survival. 

Back To Basics

It is time to go back to the fundamentals, which means an increased focus on profitability. Even though this is evergreen advice for any business, the optimum moment to put this into reality is during a probable economic slump. 

It’s important to craft immediate strategies to reduce low-priority expenditures, carefully watch high-priority costs, and adopt a more watchful approach regarding ongoing operational costs. 

This can be backed by focusing on winning customers. Startups can keep their Customer Acquisition Cost (CAC) to a minimum by leveraging their strategic partnerships. It is important to create industry relationships that can convert users/consumers with high intent (or retain existing ones) rather than blowing resources on garnering a million eyes to your brand with a poor conversion percentage.

Similarly, embrace the culture of a frugal and lean approach. Being lean involves much more than just saving money. Experiment small and scale up only after proof of success. Many organisations invest a lot of effort and money in developing solutions that don’t have the desired impact. A lean approach makes it easier to eliminate ineffective concepts and confirm those with actual potential quickly.

During times of uncertainty, the impact of using a data-driven approach for business planning and strategy is the key. However, the focus should only be on the metrics that can help you to make decisions, not the much overrated off-the shelves analytics popularly known as vanity metrics. Even though they can make you feel fantastic, they can also prove hardly insightful for ensuing any positive action.  

Innovate & Collaborate

Additionally, an market downturn shouldn’t be a hindrance to your expansion plans. The success stories of Netflix and Groupon were written in the era of the financial slump. It is essential to consider strategic alliances and partnerships with allied players to scale up more effectively. 

Lastly, foster transparency and trust with your employees, customers, and investors. The vision is to create a sustainable business through a better customer experience, an engaged workforce, and trusted investor relationships.

Road Ahead

On a global scale, India is poised to weather this winter far more easily as most top-tier funds in India have raised record funds this year, an indicator that we could see intense investment cycles ahead. 

The buildup of dry powder is primarily due to a recent pullback by VC funds that are being picky about their investments. The focus is on companies that have strong fundamentals and a path to profitability.  Moreover, recent global developments have further improved India’s relative attractiveness as an investment destination for many investors. 

To sum up, not all will be lost in the coming months. Resilient startups will continue to emerge gloriously during such times, especially the ones who have reinvented themselves and relied on business fundamentals, while many others operating on vanity might perish in the long run.