Funding winter and corporate governance woes separated the men from the boys in the country's start-up space in 2023 which saw funds into the segment tapering to just around $8 billion.
All said, investors are hopeful of strong growth of the maturing start-up ecosystem in the new year.
Edtech and health tech segments that grew exponentially during the pandemic plunged into an abyss of financial uncertainties, with several firms shuttering their business, and the valuation of prominent players like BYJU'S and PharmEasy plummeting 85-90 per cent.
Indian start-ups are estimated to have laid off over 15,000 employees in 2023.
Start-ups with sustainable business models as well as the well-capitalised ones are expected to weather the current turmoil. And the horizon in 2024 is expected to be "exciting" as well as "challenging".
Venture capital firm Lightspeed, which has invested in firms like BYJU'S, Magicpin, and OYO, said a high cycle or a low cycle of two years does not impact the outcome of companies that get built over 8-10 years.
"As such, we think of the current phase as a part of the growing up of our ecosystem. Yes, there will be consolidation, valuation correction, and even some mortality of companies but all in all, the result will still be progress," Lightspeed's Partner Rahul Taneja said.
Reflecting a challenging environment for the start-up ecosystem, which has churned out numerous unicorns, the total funding tumbled this year compared to the staggering $35 billion it attracted two years ago.
Also, corporate governance issues came to the fore at various promising unicorns making the investors' community jittery. BharatPe, GoMechanic, 4B, and BYJU'S all had to grapple with multiple red flags in terms of corporate governance ways as well as funding.
Debt fund Stride Ventures' managing partner Apoorva Sharma said all lenders in general have been extremely cautious and the primary focus has been to ensure healthy asset quality.
"The average ticket size is already in the range of say Rs 20 crore now, which in 2021 was close to Rs 45-50 crore. If you look at venture capital investments, it was about $35 billion in 2021, about $25 billion in 2022, and in 2023, it will be roughly about $8 billion. It is declining every year," she said.
Further, Sharma said several unicorns have not gone for public valuation and those who are raising funds are doing so either by way of flat valuation or promising discounts in the next round of fundraise.
According to venture capitalist firm Fundamentum Partnership, the number of unicorns dropped to 72 as of November this year from 110 in 2022.
"As of November 2023, India had 72 unicorns in comparison to 110 unicorns last year," Fundamentum Partnership's Principal Prateek Jain said.
Consulting firm HexGn's CEO Jaspreet Sethi estimates that health and medtech segments saw an 8 per cent valuation decline while in the case of e-tail, marketplaces, and portals, the fall is 9 per cent. The fintech sector saw a marginal decline of 2 per cent in 2023, he added.
IvyCap Ventures' founder and managing partner Vikram Gupta said that approximately 30 unicorns saw changes in their status between 2021-2023.
"When we look at specific sectors, the multiples in the consumer/ D2C sectors might have dropped from 5-7 times in 2021 (price to revenue) to around 2-3 times in 2022. Now, they may be showing an increase of 2-4 times.
"Similarly, in SaaS, these multiples may have dropped from 10-30 times in 2021 to 3-5 times in 2022, and may currently be coming to 5-7 times in 2023," Gupta said.
On the other hand, start-ups with sustainable business models and those innovating around artificial intelligence, Software-as-a-Service (SaaS), deep tech, fintech, electric vehicles, and casual gaming, are anticipated to progress well.
Softbank Group, which has invested $15 billion in India in the last few years, sees the emergence of global technology companies out of India and maturity in the funding ecosystem with many venture capital players getting IPO (Initial Public Offering) exits.
"Our India portfolio has done quite well in terms of exits as well as operating performance of companies. Even in 2023, we saw companies like Lenskart, Firstcry, Meesho, and Ola Electric raise capital from external investors. This has been possible due to the strong operating performance of these companies. Several companies are maturing and growing well," SoftBank Investment Advisers Investment Director Narendra Rathi said.
As founders continue to focus on operating performance, he said they are driving robust, sustainable growth with a clear path to cash flow break-even.
"We continue to see investor interest in such high-quality companies. "Entrepreneurs and shareholders are now being more reasonable on valuation expectations," Rathi said.
While investors like Berkshire Hathaway exited from prominent fintech player One97 Communications (Paytm) at a loss of around 31 per cent per share, Honasa Consumer, which sells products under the Mamaearth brand, brought cheers to investors, including Bollywood actor Shilpa Shetty Kundra, with a good IPO.
"India's GDP per capita is at $2,600. This is like 2005 in China, where discretionary spending and consumption economies take off when countries cross $2,000 GDP per capita," Fireside Ventures' Partner and Co-Founder Vinay Singh said.
According to Lightspeed's Taneja, 2024 promises to be exciting and challenging in equal parts.
"We believe that this will also be the year when we will see a lot more IPOs coming through. From a theme standpoint, we believe that core themes such as local consumption, fintech, enterprise SaaS, and infrastructure - will continue to dominate deal flow," he said.
Fintech firm Mobikwik and e-commerce firm Meesho reported their first-ever profits while India's biggest fintech firm PhonePe raised $850 million at a pre-money valuation of $12 billion during the year.
The growth in the fintech sector is also being helped by the crackdown on Chinese loan apps that have created space for Indian firms.
