As the funding winter continues to plague India’s startup ecosystem, founders have now shifted their focus to profitable businesses over growth, says a new report by venture debt firm InnoVen Capital.
At least 62% of startup founders surveyed in 2022 said that they are aiming to turn profitable at the EBITDA (earnings before interest, tax, depreciation, and amortization) level in the next two years, up from 51% in 2021, the study said.
“2022 was a challenging year for the startup ecosystem with an end to cheap money, rising interest rates and a challenging geopolitical environment. The positive aspect of the slowdown has been an increased appreciation for building sustainable business models,” said Ashish Sharma, managing partner at InnoVen Capital.
Many consider 2021 as an aberration due to over liquidity in the system, vis-a-vis 2022, which was characterised by weaker fundraise values and a slump in investment volumes.
“Most companies have taken tough actions this year (2022) and cut costs, and the focus will continue to remain on unit economics and path to profitability," Sharma said in an earlier interaction.
Keeping in view the focus on profitability, startups across the board have laid off their staff as a cost-optimization measure, firing about 22,000 since the last year. Some others have also cited corporate restructuring and performance-based reviews as the reason behind the mass layoffs.
Aligning with the observation by Sharma, the report further showed that the founders attributed the focus shift towards profitability to the overall slowdown in the funding environment in 2022, which also saw significant correction in startup valuations.
Going forward, about three-fifths of the startup founders expect the weakness in funding to continue, in fact, they expect the funding environment to be tougher in 2023, it added.
However, despite the moderation, the findings by InnoVen Capital note that about three-fourths of the total firms surveyed expect a to raise funds at a higher valuation than their last round, with fintech players being the most bullish of being able to raise an up-round.
Even as fintech retained its position as a one of the most favoured sectors, as per market intelligence firm Tracxn’s report, which noted that the sector was one of the most-funded ones in 2022, while it named edtech as one of the most “over-hyped” sectors.
Others which caught investors’ attention last year were healthtech and agritech.
According to a report by Inclusive India Finance, venture capital firms in India invested nearly $2.5 billion across agritech space in the last three years as against $3 billion over a period of 12 years, indicating a sharp rise in the investors’ interest in the sector.
In the Union Budget 2023-2024, the finance minister also proposed to set up an accelerator fund to support agritech startups as well as to encourage entrepreneurship, primarily in rural areas.
As for exit preferences, founders were not marred by the volatility in the public markets and look at a domestic public listing as the best exit option for investors, the report showed.
Recently listed startups including Nykaa, Zomato, PayTm, among others, are seen to have not been able to hold on to their lead post listing.