NOT SO LONG AGO, the buzzword in the startup ecosystem was unicorn, a moniker for startups valued over $1 billion. Every startup dreamt of becoming one, and India has minted some 100 unicorns so far. In 2021 alone, 42 startups became unicorns.

In 2023, though a different species is garnering attention—the cockroach. No animal can match a cockroach’s ability to survive changing environments and move forward. And that is the need of the hour now in the startup world, which is stuck in a funding winter.

In 2020 and 2021, the world was awash with funds injected by central banks to tide over the Covid-19 pandemic. Money was not an issue and startups raised funds in multiple rounds. Last year, however, the weather turned bleaker as central banks tightened the liquidity screws and geopolitical tensions cast a shadow from Ukraine to Taiwan, and industries struggled with supply-side challenges. With a recession looming over major developed markets, and investors turning more cautious, startups are switching to the survival mode. They will have to struggle hard, but still keep moving forward, just like the cockroach.

Data by Tracxn, which provides market intelligence for startups and private companies, says that total funds raised by startups in India in 2022 plunged 39.2 per cent year-on-year to $25.4 billion from $41.8 billion. There have been 1,939 funding rounds last year, compared with 2,903 rounds in 2021.

It is not that funding dried up completely. Seed-stage funding declined just around 18 per cent to $1.4 billion from $1.7 billion. Early-stage funding remained fairly stable, $6.9 billion in 2022 against $7 billion in 2021. Late-stage funding, however, slumped more than 48 per cent to $16.9 billion in 2022, compared with $32.8 billion in 2021.

“We have been building at backbreaking pace for almost a decade now. It was raining unicorns. This is a welcome change where everyone is just taking a step back. Things are slowing down a little bit and there is more focus on the fundamentals,” said Manu Rikhye, partner at venture capital firm Merak Ventures.

The challenges have had a huge impact on the startup ecosystem. “You now see companies talking about path to profitability versus growth. Earlier, growth was getting rewarded; just focus on growth at all costs. Now, the shift has been towards more sustainable growth and achieving profitability in a finite amount of time,” said Neha Singh, co-founder and CEO of Tracxn.

Many startups had to take a fresh look at their businesses, and some had to scale down or shut down altogether. Eight startups put up the shutters last year, including edtech players Udayy, Lido and SuperLearn; business-to-business commerce platform ShopX; and celebrity engagement platform GoNuts.

Ola, which operates a ride hailing service, shut down its quick commerce platform Ola Dash and its used-car business Ola Cars, looking to focus on its rapidly growing arm Ola Electric. Similarly, edtech company Unacademy closed its global test prep business, citing failure to find product and market fit.

Some estimates say 18,000 people were laid off by startups from across sectors in 2022. There were a lot of job cuts in the edtech space as companies that had expanded during the pandemic saw their growth momentum losing steam once normalcy set in.

“There was a lot of pandemic-driven extra demand that went away once schools came back,” said Shruti Srivastava, investment director at Avaana Capital, which has backed startups like Nykaa, Urban Company and Delhivery. “Being cognizant of how and where money is being spent needs to be embedded from day one. Growth itself should be driven in a judicious manner, instead of growth at all costs.”

Pankaj Makkar

The slump in tech stocks globally has also soured investor sentiments, especially in late-stage funding. Several new-age tech companies went public in the past few years. One97 Communications (parent of the fintech company Paytm) raised Rs18,300 crore in 2021 in the largest IPO in the Indian capital market at that time (it was eclipsed by LIC’s Rs21,000 crore issue in 2022). The stock has plunged 45 per cent from its 52-week high and 75 per cent from the issue price.

PB Fintech (which operates insurance aggregator platform Policy Bazaar), FSN E-Commerce Ventures (which runs beauty commerce platform Nykaa), restaurant aggregator Zomato, CE Info Systems (MapMyIndia) and Cartrade Tech also went public. Their valuations have all corrected sharply from their peaks. PB Fintech has declined 57 per cent from its peak; Cartrade has retreated 44 per cent from its highs; and CE Info Systems has fallen 35 per cent. FSN Ecommerce and Zomato have also declined more than 55 per cent from the peak. In comparison, the BSE Sensex went up by around 5 per cent in 2022.

“In late-stage funding, the impact in India has been more,” said Tracxn’s Singh. “There were investors like Tiger Global or Softbank, which also had a large public market portfolio. With the public market portfolio so much in the red, you saw them talk about going slow in the private market as well.”

Neha Singh

The poor performance of tech companies that got listed has clearly impacted the valuations of unlisted startups. For instance, the valuation of hotel room aggregator Oyo, which has plans to go public, reportedly fell from around $12 billion when it filed draft papers in 2021 to around $6 billion in 2022.

Tech startups seem to have gone into a wait-and-watch mode amid the weak capital market conditions before heading for an IPO. Delhivery and Tracxn are the only two startups that have hit the stock exchanges in 2022. E-commerce company Snapdeal, automobile marketplace Droom, wearables brand Boat and API Holdings (PharmEasy) have deferred their IPO plans.

Pankaj Makkar, managing director of Bertelsmann India Investments, said that in 2020 and 2021, the “market went ahead of itself” and correction that happened was welcome. “If you are growing at 70 per cent of the rate that you were growing, it is fine. But, at the same time, continue to keep moving towards the path of profitability, which you should have been doing before also,” he said.

Crucially, it is no longer the founders’ market. “Six to eight months ago, everybody was funding everything. What has happened now is that we are all in a wait-and-watch mode. Where we are investing, we are more careful about the valuations. Good startups are still getting funded. But, there is just a pause,” said Madhu Shalini Iyer, partner at Rocketship VC, a Silicon Valley-based venture capital firm.

So, which are the sectors where startups are still getting funded?

Consumer internet companies continue to see a lot of traction. From a size of around $46 billion in 2020, the sector is estimated to touch $111.4 billion by 2025 and $350 billion by 2030. There were several large funding raising deals in this space last year. For instance, food delivery startup Swiggy raised $700 million from a clutch of investors. Pune-based B2B commerce firm ElasticRun raised $300 million from investors led by SoftBank; fintech company Stashfin raised $270 million; and social media company Sharechat raised $255 million.

There were several big acquisitions in this space as well. Zomato picked up quick commerce firm Blinkit, Reliance Retail invested in quick commerce firm Dunzo and inner-wear brand Clovia.com, and e-commerce shipping platform Shiprocket acquired a majority stake in the e-commerce SaaS platform Pickrr.

Enterprise software and SaaS (software as a service) startups, including those helping small and medium enterprises go digital, are getting strong investor interest. Estimates are that funding in SaaS companies touched $6.5 billion in 2022.

Investors are also keen on companies that focus on climate tech. In November 2022, Merak Ventures and Huddle launched a climate tech focussed accelerator programme. “Climate is one of the largest challenges that humanity faces, and innovation and technology can make the most impact. In the next 12-months or so, we are going to actively focus on climate tech as a sector, within which we will focus on specific sub sectors like agri-supply chains and mobility to all things carbon,” said Rikhye of Merak Ventures.

Avaana Capital is also bullish about climate tech startups. “Everybody agrees that transport is one of the largest contributors to greenhouse emissions. So, mobility will see a lot of innovation happening in terms of vehicles, battery tech, charging infrastructure, charging times and public transport,” said Srivastava of Avaana. It has already invested in electric vehicle startup Turno, climate career platform Terra.do, agritech startup Eeki Foods and in Intello Labs, which has launched an AI-powered agri-produce trade exchange platform.

Space technology is also getting attention on the back of recent success of some startups in the sector. A decade ago, there was only one startup in this space; now there are about 100. Events such as the country’s first private rocket launch—Vikram-S by Skyroot Aerospace—and the launch of the satellite Anand by another startup, Pixxel, have boosted the interest in this sector.

While the base is still low, compared with some other sectors, the total funding the private space startups received in 2022 was up about 60 per cent to more than $108 million.

Iyer of Rocketship says investors are now increasingly looking for unique ideas. Rocketship has invested in companies like Apna (platform connecting jobseekers with employers), Khatabook (a digital ledger app for small businesses), Jar (a daily gold savings app), Uravu Labs (a deeptech startup creating sustainable water out of air) and Agnikul (space tech).

“India is now producing blueprints for the rest of the world and this is because these are new ideas that are homegrown and have worked really well. They are not ‘me-toos’ of anything from the US,” said Iyer.

Bertelsmaan India has backed some 20 companies and several of them have reached a critical mass in the past few years, like the meat delivery startup Licious, digital lending company LendingKart, online furniture seller Pepperfry and Shiprocket. “Any company that is tech and tech-enabled, which is a high-growth company trying to innovate to solve big problems in a large market with good unit economics, is the company we are willing to back,” said Makkar.

Companies that are focused on connecting gig workers and employers are also seeing good traction. Bengaluru-based work fulfilment platform Awign, for instance, recently raised $15 million from investors, including Bertelsmann India, Amicus Capital, and Michael and Susan Dell Foundation.

Will investors warm up to startups in 2023?

“I think it will get worse before it gets better,” said Rikhye of Merak Ventures. “The pendulum in conversations, in discussions, in forums has swung the other way, where there is a lot of conservatism, a lot more apprehension.”

Iyer said it would be 12 to 18 months before the uncertainty settled down. But, good companies would continue to attract investors and the bar was really high now. “A lot of VC funds died in difficult downturns. If you don’t deploy capital in good companies, then you are dead,” she said.

So, as the economic uncertainty continues, it is a challenge spotting the right startup. For startups themselves, it is a balancing act of becoming efficient and profitable, and ensuring that they emerge out of this funding winter on a stronger footing. “You should not come out of this downturn limping,” said Iyer. “You need a balance that you are spending the right amount of money and making sure you are growing really well.”

Startup funding in 2022

Funds raised by startups in 2022 declined 39 per cent to $25.4 billion

Funding rounds in 2022 declined to 1,939, from 2,903 in 2021

Seed stage funding was down 18 per cent to $1.4 billion

Late stage funding was down 48 per cent to $16.9 billion

Early stage funding was stable at $6.9 billion against $7 billion in 2021

In 2022, 23 unicorns were created in India; in 2021, 42 unicorns were created

2,404 startups closed down, compared with 1,012 in 2021

Edtech was among the worst hit sectors, with 25 startups shutting down

About 18,000 people across startups were laid off in 2022