What Does 2023 Hold For Startup Funding In India?

Startups are now the driving force behind innovation-driven economic recovery, reorientation, and growth while also constructing a distributed future in line with the country’s changing requirements and value system. 

Out of the approximately $90 Tn global economy, the startup economy is estimated to be worth close to $3 Tn and is expanding quickly. During the pandemic, the importance of startups in fostering innovation in response to the fast-shifting global environment was made abundantly clear. They not only helped save lives but also paved the road for the recovery of the economy. 

Startups are increasingly providing platforms and technologies to encourage cross-border collaboration and innovation, aiding economies in reaching Sustainable Development Goals. Thus, they contribute significantly to the development of technology, long-term growth, and crisis management throughout the world.

According to experts, Indian startups with good unit economics will fare better than their foreign counterparts throughout the current global economic crisis. India has emerged as a bright spot in comparison to developed countries like the US and Europe despite the headwinds battering markets globally, and it will continue to do so. 

According to the Economic Survey, there was at least one new company in 555 of India’s districts, illustrating the sharp increase in the number of startups over the previous six years, with a sizable portion of them based in IT-related industries.

India’s startup environment has grown in the previous six years, with the number of newly recognised firms rising sharply from 733 in 2016–17 to over 14,000 in 2021–22. After the US and China, India has the third-largest startup ecosystem in the world. 

The overall number of unicorn startups in India increased to 83 in 2021 with 44 Indian companies achieving this status, the majority of which are in the services industry. The USA takes the top rank on the list with approximately 460 unicorns, followed by China in second place with approximately 300 unicorns.

Observations For 2023

More IPOs 

Several businesses in the Indian startup ecosystem are at a crossroads where they must make ‘hard decisions’ on how to proceed with future growth. Over the next two to three years, there will be a lot of IPOs (initial public offerings) from the Indian startup ecosystem in the digital and tech medium. 

Many other members of the ecosystem share this opinion, particularly in light of the central government’s decision in March to permit firms to list directly on stock exchanges abroad before doing so in India.

Compelled Mergers & Acquisitions 

Many VC-funded businesses will be compelled to merge in order to lower burn rates and rationalise spending, improving their chances of surviving. Further layoffs and a downsizing of the businesses will follow from this. This result will be painful for everyone.

Changes In The VC Ecosystem 

The venture capital industry is changing, and we have already noticed significant losses. A big response from LPs will also cause a significant upheaval in the industry. 

I predict that over 80% of the funds won’t be able to start a new fund, similar to what we experienced in the early 2000s. Several funds will be required to complete follow-on rounds for the companies in their current portfolio. This will inevitably lead to returns that are below the hurdle rate requirement.

Non-Dilutive Funding 

Even if hiring equity investors is the quickest path to financial success, entrepreneurs frequently lose their own voice when giving a VC investor a seat on the board. The use of VC finance has several benefits and drawbacks. 

During the early phases, angel or venture capital investment may not always fit with company aims, from regulating business practices to removing individuals from managerial roles. Non-dilutive debt-based fundraising approaches strive to strengthen the startup entrepreneur’s voice by advancing rather than lowering their goals. Debt-based financing can boost valuation as well, luring VC funding at a later stage.

Boost In Female-Led Startup Funding 

In 2022, female-led startup funding has also come up for consideration among VC investors. The number of female-founded businesses that want to diversify the corporate environment grows along with the startup scene.

Asset Tokenisation 

Investors are starting to sign tokenisation agreements with startup companies, investing a stake in the NFT rather than the company itself, as digitally-driven entrepreneurs continue to link their capital assets to blockchain-based tokens. 

Asset tokenisation, which participates in a liquid environment, lowers investor risk and encourages a transparent startup funding exchange with a high probability of return via a secure blockchain.

A Digital Future 

The future of startup finance is digital. It won’t be long before all capital investments are funded using decentralised frameworks that aim to increase cross-border money movement and improve both firm and investor security, as the popularity of blockchain and fintech-based money movement continues to grow post-pandemic.

Volatile markets as a result of slowing economies, rising interest rates, and international unrest may present founders and investors with a hazy investment picture in the coming months.