Why Entrepreneurs Shouldn't Be Deterred by Funding Winter The rise of Internet penetration, growing digitization, availability of cheap capital, and supportive policies by the government have all contributed to supercharge entrepreneurship and investment in the country.
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The Indian startup ecosystem has come a long way over the last decade, peaking with $41 billion invested in 2021 as per Tracxn. India is now ranked the third-largest startup ecosystem globally, with nearly 80,000 startups. The rise of Internet penetration, growing digitization, availability of cheap capital, and supportive policies by the government have all contributed to supercharge entrepreneurship and investment in the country.
However, since early 2022, a funding winter has set in globally due to several macroeconomic and geopolitical issues, including the Russia-Ukraine war, post-pandemic cooling of digital economy, high inflation rates, and resultant interest rate hikes across geographies. And as recently as a few weeks ago, the demise of SVB has brought further macroeconomic uncertainty.
These have impacted the Indian startup ecosystem heavily, and investment dropped by over a third in 2022, to about $26 billion as per Tracxn. Latestage investors have especially pulled back with nearly a 45% drop, with large funds like Tiger and Softbank putting a freeze on India investments. Thousands of employees in tech companies have lost their jobs amidst massive layoffs recently. And the winter isn't abating yet, with a recovery expected only after the end of this year.
Clearly, these are as tough times as any for Indian startups. The gloom and doom all around can push the weak-hearted founders into despair. Yet, these extraordinary times present a massive opportunity for the resilient. There are two silver linings to the dark clouds to appreciate upfront. First, investment cycles are a recurring economic phenomenon, and a recovery is eventually expected, probably in 12-18 months. Second, while the cost of capital has increased and investors are wary of deploying capital, there is a lot of dry powder in the ecosystem, especially as record amounts of new early-stage funds have been raised recently. So, I believe the following opportunities have arisen.
Founders who have strong business models with sound unit economics today will shine through, which was unfortunately not a given earlier
BUILD MARKET LEADERSHIP
The time of cheap capital, expensive customer acquisition and inflated valuations is behind us. Companies need to earn their growth & can't just buy it anymore or keep ignoring the profitability question. Founders who have strong business models with sound unit economics today will shine through, which was unfortunately not a given earlier. Competition that isn't as agile to adapt to new realities will wither away. There will be market consolidation, especially in noisy sectors like fintech and edtech. Sensible customers & sales partners too are looking to buy from or represent well-capitalized, stable, and fundamentally strong companies; get them in your corner. Most competition might be in survival mode; beat them further with product innovation. It's an opportunity to surge ahead of the pack for the lean & strong.
BUILD AN UNBEATABLE TEAM
After the hard times in acquiring and retaining talent for the past 2-3 years, there's finally respite. With massive layoffs, almost a first in the Indian tech ecosystem, employees have a new-found appreciation for stability over compensation; so acquire a team for the long haul. It's also a time for active stakeholder management. No news is perceived as bad news, so over communicate with existing investors and customers. Bring everyone on board with your short-term strategy, long-term plans and raise internal bridge rounds if possible.
FOCUS ON EMERGING SECTORS
Despite the overall downtrend, some sectors are still growing or are under-penetrated for Indian startups. For example, climatetech is witnessing growing interest globally from customers & investors. While accessibility & penetration of digitization in fintech & edtech has grown considerably, healthtech sector still is highly under-penetrated & continues to be a massive opportunity.
