The near collapse of Byju’s and the ructions within Paytm have ignited fears about the fortunes of the start-up industry. The Cassandras have started to prophecy gloom and doom for newbie entrepreneurs with a burning desire to set their dreams alight.

There is no denying that these are tough times for the start-up space. The torrent of cash that once flowed into the sector in multiple rounds of funding has started to cool. Investors are increasingly wary and circumspect before opening up their wallets. Valuations have slipped and the dark clouds of layoffs still loom over the sector.

But a quick round of interactions with start-up satraps also suggests that the muttered forebodings about future funding rounds may be overblown.

While they acknowledge that the number of funding rounds and the amount of cash raised in each round has dipped since 2022, the green shoots of a recovery have started to appear in the first six months of this calendar year with niche verticals starting to draw investor interest.

Areas like quick commerce, enterprise tech, fintech, and cleantech are dominating the funding rounds so far in 2024, emerging areas such as space, AI, semiconductor are also starting to attract investor interest.

“In the early years (2010-15), the ecosystem saw few sectors attracting funding such as horizontal e-commerce (e.g., Flipkart), basic digitization in consumer services like transportation (Ola), hospitality (Makemytrip, Oyo), food (Zomato) and employment (Infoedge),” said Manish Khetrapal, co-founder and partner WaterBridge Ventures and co-chair, VC council, IVCA.

“The second wave (2015-21) saw the deepening of sectors like fintech (Paytm, Razorpay, PolicyBazaar), ed-tech (Byju’s, Unacademy), D2C (Mamaearth), B2B commerce (Udaan), logistics (Delhivery) and vertical e-commerce (Firstcry, Lenskart, Nykaa).

“The third wave, post-Covid (2022 onwards) has seen new sectors develop due to resources such as talent, capital and regulatory support. This includes deep tech areas such as space and defence, global software (SaaS and AI). Conversely some sectors like ed-tech and health tech, seem less attractive now due to not yielding the expected ROI or appropriate revenue and profit pools,” Khetrapal said.

Mature play

“The Indian start-up ecosystem is maturing from an initial learning phase to a more evolved phase and as part of that, VCs and investors are looking at sectors which are creating products as well as greater value,” said Deepak Daftari, an angel investor and mentor, IT Entrepreneurs and e-commerce national committee, Bengal Chamber.

“Tech entrepreneurs are exploring more matured technologies moving from just services model to products and companies like Agnikul and Astrogate Labs are garnering the interest of investors.

“Even though the gestation period and funding requirements are higher in some of the emerging sectors, the return is also higher,” Daftari said.

“Sector specific funds like AI, deep tech, fintech etc. has got traction due to favourable policy which has opened up the sector for investment especially in areas such as semiconductor, space, insuretech, fintech etc. But there are also a few sectors on the negative list due to business growth prospects and sustainable model related issues,” said Anil Joshi, managing partner, Unicorn India Ventures.

“While sector specific trends are natural, diversification remains essential for long term sustainability. Investors have recognized that these technologies hold the key to future growth and competitive advantage,” said Manoj Agarwal, co-founder and managing partner, Seafund.

Pain points

In terms of funding, the first six months of 2024 saw Indian start-ups garner $5.3 billion, which is almost flat compared with the first six months of 2023 at $5.4 billion and lower compared with $19 billion in the first six months of 2022, according to the Indian tech start-up funding report of Inc42.

The number of funding rounds in H1-2024 was 504 compared with 470 in H1-2023 representing a marginal improvement, but still less than 900 clocked in H1-2022.

Byju’s was once the country’s most valuable start-up at $22 billion. It’s valuations have nosedived by over 90 per cent. In June, investment firm Prosus said in its annual report that it has written off its 9.6 per cent stake in the company recording a fair value loss of $493 million.

Paytm, which had a listing day closing of ₹1,560 per share on November 2021, has seen its scrips fall to the ₹560-mark on August 16, 2024.

But at same time, start-ups such as indiamart.com, infoedge, makemytrip are trading at multiple times of their listing price.

Analysts and investors mark this decline to several factors — the global trend where investors are looking at exits and portfolio adjustments amid uncertainties, chasing of companies that have higher probability of public listing and avoiding business models that are less resilient from a future cashflow perspective.

Also, investors are increasingly weighing in on the credentials of the start-up founders and companies with more transparent corporate governance.

Global trend

“Start-up funding in India has reduced in 2023 and in H1-2024, aligning with the global reduction seen in other large markets like the USA, UK, China and Israel. This is part of an overall correction from the peak of 2020-22 in VC funding globally, as investors wait for more exits and recycling of capital before committing more to this asset class,” said Khetrapal.

“Later stage growth funding (especially series C+) is now selectively chasing companies that can scale profitably and have higher probability of listing (IPO) or achieving some sort of exit for investors within reasonable time frame of 3-4 years,” he said.

“2021 saw crazy investment and reasonably higher valuation leading to corrections in 2022 which resulted in funding winter. However, over the last few months, trends are quite positive,” said Joshi.

“Investors now prioritize value over hype, leading to a healthier investment landscape,” said Agarwal.

“Despite a cautious stand, H1-24 data indicates a resurgence in funding activity for early and growth stage start-ups. This cautious optimism however, does not extend to late-stage start-ups whose valuations appear to be stretched,” said Premchand Chandrasekharan, partner, Avalon Consulting.

The fall in funding has also been accompanied by layoffs as the companies engaged in restructuring and cost cutting initiatives.

Over 100 start-ups have laid off more than 37,000 employees according to the Indian start-up layoff tracker by Inc42 over the past few years. The worst impacted sector has been edtech with the highest aggregate layoff being recorded at Byju’s.

“It is indeed easier for entrepreneurs operating in trending sectors to raise capital as opposed to those who are not. This is why we are seeing significant layoffs among start-ups which are unable to either become sustainable or raise further funds,” said Neha Juneja, co-founder and CEO, India P2P.

“The VCs and investors are increasingly focusing more on start-up founders and companies that have solid internal checks and balances, who keep the board and investors updated and who are creating value not only for their
customers but also investors and at the same time creating IPs which benefit both global and local audience,” said Daftari.

While the investment focus has narrowed, investors remain optimistic on the future prospects both on entry and exit with several of the 116 soonicorns (valuations close to $1 billion) looking to raise further capital as well as large initial public offers in the pipeline including the ₹10,000 crore proposed IPO of Swiggy.

“VCs in India are reportedly sitting close to $20 billion of dry powder waiting for the global scenario to stabilise,” said Chandrasekharan.

“Apart from funds, start-ups would need mentoring and proper evaluation of their ventures. The nature of financing may also vary like debt or equity depending upon the nature of the idea,” said Arnab Basu, president designate and chairperson, IT Committee, Bengal Chamber and advisory leader, PwC India.

Ease of doing business

On the regulatory front, the abolishment of angel tax in the Union budget has been widely welcomed by investors and entrepreneurs. However, more could be done towards ease of doing business and compliance.

“Simplification of taxation and labour laws can improve ease of doing business for start-ups, for example offering a single low GST rate for start-ups. Streamlining the incorporation process and reducing bureaucratic red tape, through a single window setup will make it easier to start and run new businesses. Ensuring IP rights protection and providing a transparent process for legal recourse, is also crucial for start-up confidence,” said Chandrasekharan.