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Have a Robust Business? Don't Worry About Funding Winter In 2023 If you have a business with the right characteristics, the going will be good for you

By Rajul Garg

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For the tech venture ecosystem, 2022 has been a transition year. Multiple factors led to the crescendo that built up the investment activity, and the co-related startup activity in 2020-21 and it started tapering down in 2022.

Some of the factors that built it up included:

1. Normal cyclicality of venture markets: India has had multiple periods of heightened venture activity.-In early 2000s (Naukri), 2008-09 (Flipkart, Ola), 2014-15 (Meesho, others) and 2020-21 (Fintechs, others). It was due.

2. Increased Internet penetration in India with cheap Internet plans and affordable phones. Each wave was accompanied by an expected increase in Internet penetration.

3. Increased digitization because of Covid. This acted like fuel on fire.

4. Cheap money: Almost zero-dollar interest rates and the system being flush with large amounts of new capital.

These factors started running their course from the beginning of 2022. Interest rates have gone up continuously and are expected to go up even more to drive down inflation. Internet penetration has stabilized and there is a realization and focus on profitability versus growth. The one factor which continued to stay is the increased digitization. Software has been eating the world and it continues to do so.

There was a massive change from Q1 2022 to Q4 2022. Global ventures markets are down nearly 50 per cent ($142 billion to $74 billion) from Q1 to Q3 and expected to go down further in Q1 of 2023. The large super active funds have slowed down or stopped investing altogether for a bit. Softbank's Q3 presentation was titled 'Defense'. Tiger Global has announced hardly any new investments in the last six months. One of the largest funds in India said that it has seen zero outside led-up rounds in their portfolio this year.

What does this mean to you for 2023 and beyond as a startup entrepreneur?

1. Be prudent with capital spends. It would be unreasonable to expect capital to open up in 2023; it seems it will take longer. Logic would suggest it may get worse before it starts getting better.

2. Keep capital runway for two years until the end of 2024 if you can. If you are raising a new round, raise some extra to keep a cushion even if it's slightly more dilutive.

There is some good news for you as well

1. Funds have raised capital and have capital. They are more careful but will make investments when they see something they like. The number of funds has also grown in India, giving you more choices.

2. There will be a flight to quality, hence, quality businesses will get dis-proportionate amount of interest.

3. Lot of 'me too' players that came in will clear out, leaving open spaces for market domination if you are at the right place.

4. Capital burning businesses with weak business models spoil the market for solid players. Many will pivot/clear out/reduce activity significantly. Just follow the advertisements on television—who was advertising last year compared who is advertising in 2023 and you will see the difference.

5. Hiring will become easier. Companies will lay off and more people will be available in the market.

Thematically, digitization continues. Finance, healthcare, insurance, content, commerce, logistics, brands—there are opportunities all around. New technology infrastructures are at the beginning of the S-curve and will see adoption in enterprises; tech such as AI, blockchain, container architectures. India's journey as a global software powerhouse has continued un-abated though Y2K, 9/11, 2008 and COVID, and there is no reason to believe it will pause. India's GDP growth has also continued organically and is expected to continue. As GDP per capita crosses a certain threshold, a new large wave can get built up.

They say downturns are a great time to start for all these reasons. If you have a business with the right characteristics, the going will be good for you.

Rajul Garg

Founder and Managing Partner at Leo Capital India

Rajul is a serial entrepreneur turned investor. He advises Leo Capital, for investments into early stage India tech opportunities.  Previously, he has co-founded Pine Labs, a leader in payment software and GlobalLogic, a large outsourced product development company. He also serves on several Boards, such as PeopleStrong, Edureka and others.  Rajul regularly writes on topics pertaining to entrepreneurship, fund-raising, venture capital and leadership.

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