Bl interview. ‘Investor mindset has turned towards businesses with profitability and operational efficiency’

The Indian Tech startup ecosystem has raised a total of less than $8B to date in 2023, becoming the least funded year in the past seven years. The number of funding rounds in 2023 YTD has also witnessed a decline of more than 55% compared to the rounds witnessed in the past five years.

This drop in funding can be majorly attributed to the economic slowdown witnessed across the globe, geopolitical tensions, rise in interest rates among others. These conditions have made the markets uncertain, making investors more cautious. Investors’ mindset has also turned towards growth at any cost, pushing companies to a cost-cutting zone to sustain their business pathway.

Investor mindset has turned towards businesses with profitability and operational efficiency, rather than ambitious projects that involve higher investments in development and commercialisation. Scalability and sustainability of the business based on the changing demand in the market is also a parameter that investors look into in a business.

Retail, FinTech and Enterprise Applications have been the top funded sectors in 2022 as well as in 2023 to date in this space, though funding in 2023 in these sectors is relatively low compared to the funds raised in 2022. A similar trend is expected to be witnessed in 2024 as well. Initiatives from the government to encourage entrepreneurship in rural areas are also accelerating growth in the Retail Sector. Funding in the Internet First Brands segment has dropped relatively lower by only 37%, compared to other segments.

Higher emphasis on global climate changes and India’s target to become net zero by 2070, can accelerate investment and growth in Environment Tech and Energy Tech sectors in the coming year. This growth can already be visualised with the growing market share of EVs and the infrastructures to support the adoption of EVs.

In recent years, the Generative AI segment is also gaining investor interest at a global scale and also in India. Despite being a budding segment, its applications across industries have started to experience an increase, and startups that can fill the major industry gaps using Gen AI applications are expected to attract investments.

Interest rate hikes following COVID, as well as a spike in inflation due to geopolitical tensions, have increased the cost of capital and made investors more cautious while making any form of investment decision. This has resulted in funding falling to its lowest level in seven years; this trend is not exclusive to India; we can see it in all major global economies. This has also altered the focus of investors and founders away from rapid expansion and towards a more sustainable approach to building businesses, resulting in valuation drops for many firms with no clear path to profitability.

Interest rates in most major economies have been stable in recent months, and inflation may start cooling off in 2024, prompting central banks to decrease rates, increasing the flow of money in the markets which will have a positive impact on the funding in tech startups as well.