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2023 Saw The Lowest Number Of Startups Being Founded in A Decade. Is Funding Winter The Sole Culprit?

As the winter chill tightened its grip on India's startup ecosystem in 2023, resulting in the lowest count of startups, entrepreneurs, and investors suggest that the decline cannot be solely attributed to the funding downturn

2023 Saw The Lowest Number Of Startups Being Founded in A Decade. Is Funding Winter The Sole Culprit?
POSTED ON February 14, 2024 1:53 PM

2023 was the year when the fault lines in India’s startup landscape started coming to the fore. Unicorns like Byju’s, Swiggy and Ola, which were once touted as the pioneers in their respective fields, saw significant valuation markdowns, whereas over 15 startups downed their shutters. These included ZestMoney, FrontRow, Bluepad, Belora Cosmetics, Anar and ConnectedH.

The reasons behind these dismal occurrences echoed throughout the sector—from funding winter to investors becoming more cautious while signing term sheets to founders finally focusing on profitability.

Along with the drying up of fund flow, the Indian tech start-up ecosystem faced a substantial setback in 2023 even in terms of the number of tech startups that came up during the year. According to data from Tracxn, 2,110 new tech companies were founded in the year, which is the lowest in a decade, while the funding activity during the year totalled $8.4 billion from 1,165 rounds—the lowest in seven years.

This pales in comparison to the post-pandemic years 16,153 startups were founded in 2020 and 11,342 the year after, with the country receiving total funding of $13.6 billion in 2020 and $41.4 billion in 2021. The reason behind this mushrooming was due to the substantial shift towards digitisation, with more people staying at home and working remotely.

Problems Beyond The Winter 

A cursory glance at the 10-year Tracxn data suggests that the decline in the number of startups being founded is not a post-pandemic phenomenon, and neither is funding winter the only culprit. A similar dip occurred almost a decade ago.

14,539 and 11,570 new tech start-ups came up in 2015 and 2016, along with total funding of $9.3 billion and $5.4 billion. However, the number of new tech start-ups in 2019, went further down to 10,998 despite $16.7 billion of funds coming in.

So, what could be the reasons for these cyclical changes? This suggests that the decline in the startup sector in 2023, too, could be influenced by a combination of factors beyond just a funding crunch.

Before The Winter Set In 

Industry experts say that with over 122,000 tech companies addressing niche problems across the country and the base effect coming into play, the market might have reached saturation for innovative ideas. 

There are also significant cost disparities between founding a company a decade ago and today. The substantial initial investment required for launching a tech company, combined with the rapidly advancing technologies and fierce competition, posed considerable challenges for entrepreneurs striving for success.

Rahul Gupta, co-founder and managing partner of ValuAble debt fund, states that despite the existing challenges, the market still encourages innovation and leadership. However, over time, due to factors like a slowdown in funding, there has come a strong realisation that for a tech company to sustain and get investment, ideas must be scalable, driven by returns, and sustainable.

While there were washigh decibel news about the issues faced by fintech and edtech companies, even high-performing sectors like SaaS and e-commerce faced the brunt of drying up funds, due to a lack of return-led ideas.

Abhiroop Medhekar
Abhiroop Medhekar, founder and CEO, Velocity

Abhiroop Medhekar, founder and CEO, Velocity, a cash-flow-based financing platform, stated that one of the major reasons that entrepreneurs face issues in launching new ventures is due to lack of resources and funding after a certain point of time.

“Without three years of profitability, it is difficult for any start-up to tap into banks for any kind of growth capital. With overall funding in the tech start-up space hitting a five-year low in 2023, founders have been left with limited avenues to raise capital,” he said.

Tax Concerns Deter Global Investments 

The gradual decline in the number of start-ups and funding can also be attributed to global investors looking away from Indian start-ups due to tax implications on angel investors and cross-border transactions.

International investors, in their global investment decisions, prioritise regulatory and taxation frameworks that are straightforward. The imposition of retrospective taxes or potential changes that adversely affect returns or introduce uncertainty significantly influences their choices in capital mobilisation.

Gaurav VK Singhvi, co-founder of We Founder Circle
Gaurav VK Singhvi, co-founder of We Founder Circle

Gaurav VK Singhvi, co-founder of We Founder Circle, suggests that this apprehension is also leading to more instances of reverse flipping, or return to the homeland, which has now become a trend as the Indian start-up ecosystem has now significantly matured and firms like Groww, Pine Labs, Udaan, Razorpay are few of the big names which have relocated their headquarters and operations back to India after flipping to a foreign base.

Acknowledging these challenges, the industry has been urging the government to make angel tax regulations more investor-friendly and to establish an agile policy framework that fosters entrepreneurship and sustains investor confidence.

Betting Big For 2024

Nevertheless, in the face of numerous challenges, the cumulative funding for tech start-ups in India has reached $8.4 billion, sourced from both Indian and global investors. Tracxn's report notes that despite the funding winter and other market uncertainties, the substantial increase in funding during the fourth quarter of 2023 is viewed as an encouraging development.

Neha Singh, co-founder of Tracxn
Neha Singh, co-founder of Tracxn

Neha Singh, founder of Tracxn states that the current drop in funding is not specific to India and has been observed in all the major economies in the world. Despite the fall in 2023, India's tech startup ecosystem ranked among the top five globally for funding, securing the fourth-highest total funding to date with a 5% share of global tech startup funding.

Investors are also betting big for 2024 as they pin their hopes on the start-ups going for IPOs, which will also replenish the capital pool and help start-ups facing funding challenges.

With start-ups like FirstCry, Swiggy, Ola Electric, Digit Insurance, Oyo, etc. expected to hit public markets this year, Gupta states that the litmus test for business valuations lies in exits through public markets, serving as a genuine indicator of the actual value, depth, and maturity of capital markets. The multitude of successful IPOs, coupled with several in the pipeline and promising macroeconomic indicators, positions for a promising 2024.

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