The Fed’s policy, coupled with a frenzied IPO market in India, is likely to drive a resurgence in the funding environment, one investor said.
While 2023 saw the funding winter becoming harsher for startups across the board, the scenario is unlikely to change much in the new year. While there is some optimism among a section of the investor community about a gradual rebound, most rule out a quick recovery.
In 2023, funding in Indian tech startups hit the lowest in five years, as per Tracxn data, continuing a funding slump that began in the middle of last year. “If we start seeing a reversal in some of the macro issues, one can then expect a gradual improvement in the funding environment,” said Ashish Sharma, managing partner at venture debt firm InnoVen Capital.
He expects funding to remain sluggish in the year ahead. “From an India standpoint, there are two other things to keep an eye on — the general elections and the performance of tech companies that have gone public.”
Much like Sharma, many investors will closely watch the impact of the parliamentary elections and the US Federal Reserve’s monetary policy on the funding environment. Earlier this month, the Fed signalled three rate cuts in the year ahead, if inflation data continues to cooperate.
The Fed’s policy, coupled with a frenzied IPO market in India, is likely to drive a resurgence in the funding environment, one investor said. Besides IPOs, both the benchmark indices have been on a bull run in the past few months and hit lifetime highs more than once.
“Generally, private investing follows public markets with a lag so we hope next year is better. There’s a bunch of macro triggers like the elections and Fed’s policy that might dictate short-term sentiment,” said Kanika Agarrwal, partner at early-stage investor IndiaQuotient.
However, Agarrwal believes that high quality teams and founders have found fresh capital even in bad years and a higher number of great companies are started in bear markets than in good times. This has been echoed by most investors who believe that startups with strong fundamentals will never face any any dearth of capital.
“Good businesses, delivering a healthy margin profile and strong customer love will see no signs of funding winter,” said Arpit Beri, partner – India investments at Jungle Ventures. He said instead of focusing on any particular sector such as artificial intelligence or electric vehicles, investors will rather look for strong business models next year.
While the pandemic-driven surge in liquidity had resulted in a funding boom in 2021, investors are now largely confident that those days of easy capital and sky-high valuations are gone for good. Some of these startups which had raised funds at high valuations amid an abundant flow of capital, saw their valuations drop this year, including troubled edtech major Byju’s.
The valuation crash of these startups might continue next year as well, one investor said, adding that businesses with lean and efficient models and a sustainable growth outlook fare better in terms of investments during cautious times.
Several investors are expecting a pickup in funding in the second half of 2024, after the election. “Startups must brace themselves for choppy waters for the first six months… while the second half promises a launchpad for those who adapt, innovate, and stay the course,” said Manu Rikhye, partner at Merak Ventures. However, he added that a full recovery in the funding environment might be a marathon, and not a sprint.
Among the sectors, AI, fintech, enterprise software-as-a-sevice, healthtech and sustainability tech shine the brighest when it comes to investor interest for next year. While consumer businesses saw a boom in funding this year, the trend is not likely to continue in 2024. “A decline in the emergence of direct-to-consumer brands as funded entities is foreseen due to market saturation,” noted Saloni Jain, founding partner at Sunicon Ventures.
Within AI, startups with generative AI-based offerings will take centre stage next year as will enterprise-focused offerings. Besides these, sectors such as agritech, spacetech, and insurtech, diagnostics, and gaming will also attract the investors.
Source:financialexpress.com