The start-up world, which has witnessed a meltdown of sorts, may soon stage a recovery, says Neha Singh, the Co-founder and CEO of Tracxn, a global platform that tracks start-ups and private companies. In a free-wheeling chat with businessline, Neha shared her insights on forces that are at play in the start-up sector and what to expect in the next few quarters. Excerpts:
Your H1 2023 India Tech report shows that both deal activity and funding have fallen drastically. Could things get much worse before they get any better?
Yes, the deal activity has fallen compared to last year, which was lower than 2021 obviously, which was like a peak year. H1 2023 is even much lower than the previous year. And this is the overall deal activity. This [the decline in deal activity] is more prominent in the late stage. One interesting stat everyone had been talking about is the number of new unicorn rounds. In India, in 2021, there were more than 40 new unicorns that got created. Last year, there were about 23. This year, it has been seven months and it has been zero. So, the difference is very stark. And in a lot of ways, the funding, etc is one of the lowest that we have seen in the last five years or so. In terms of new unicorns that got created, it’s one of the lowest in the last, say, 10 years.
Coming to the second question, which is, when will it recover? If you look at the investors, they are still continuing to meet companies. One of the things that we hear from them is that there’s a little bit of a valuation mismatch...the valuation at which they would like to put in the money and the valuation at which the companies had probably raised money previously, or would like to raise the next round of funding. If you look at the public markets, the tech stocks had seen a lot of correction. In private markets...the correction can wait, because the companies can delay the time at which they want to raise the funding. So that is one of the things that we are hearing...they are looking to do the deals, they are sitting on a lot of dry powder, they’re working, they’re meeting companies, but they also want to put money at the right valuation. And the second thing is, they’re looking at profitable model, because now the cost of capital is different. People want profitability... not like in the distant future, but more in the near-term. Quarter on quarter, the fall has probably sort of plateaued.
The second thing is that if you look at the global public tech stocks...the Nasdaq, for instance...has sort of recovered quite a lot. Typically, private markets see a two to three quarters lag from the public equity markets. So hopefully, people are expecting that in the next one or two quarters, things should start looking better.
The impact of the funding winter has not been the same on everyone. What kind of differentiated strategies do you see start-ups adopting, given their position in terms of scale, growth cycle, etc.
A lot of layoffs are happening across the sector. One of the reasons is that people had overhired in the bull cycle. So they want to extend their runway and decrease their cash burn.
Second, now, the narrative has changed. It sort of oscillates between growth and profitability. Right now, companies are talking about becoming profitable within a few quarters or so. The cost of capital is now higher than what it was probably in the last few years. The number of funding rounds are also much lesser. So the companies are also very cautious about expanding.
So basically the focus is going to be more on quality than quantity, both from a funding perspective and from deals and acquisitions perspective..
That’s correct.
The difficult environment has forced start-ups to revisit their business models and reset growth milestones. But what kind of changes has it unleashed on the VCs and private equity players’ side?
The attitude of investors has changed considerably since the start of funding winter, and the global volatility has made investors more cautious. Instead of focusing on rapid growth, investors have shifted their focus towards companies with strong fundamentals, and a clear path to profitability.
Investors are also preferring to invest in their existing portfolio rather than take on more risk by making new investments. Rising inflation and interest rates have had an impact on investments, forcing businesses all over the world to decrease costs in order to conserve cash. The top investors in H1 2023 were 100X.VC, IPV, and Accel. IPV, Y Combinator, and 100X.VC stood out as the top seed investors, while Peak XV Partners, Accel, and Athera excelled as early-stage investors. Avataar Ventures, ASVF, and Filter Capital showcased their prowess as top late-stage investors
Many people say that the turbulence that we’ve seen in recent months has kind of levelled the field when it comes to competition between small and large players. Is this view correct?
It’s sort of mixed. Large players in the market certainly will have less money to spend because they must now concentrate more on managing expenses and cost-cutting, but they will still have bigger brand recognition and investor trust than more recent early-stage companies, which is a big advantage. Having said that , you cannot continue to have negative unit economics and continue to burn based on that.
In the long run, people will focus on things which are more long lasting and more cost effective. So I think for the ecosystem, it is good. I think it has both pros and cons for the smaller players.
Governance has become another hot-button issue. Many experts say that lack of bandwidth on the VCs’ side is one of the fundamental reasons for some of the mayhem. Do you agree?
The ecosystem has become large. That is why you have some bad apples. Investors are fine with some of the companies not performing well if the market is tough or if they are not able to get the business. But they don’t like poor governance or if some numbers do not get reported properly. What will happen is there will be more questions around...are you filing the annual report on time? Is your audit getting closed on time, etc.
Earlier, there was more leeway. For investors, it [governance] may not have been top of the mind thing. Now, that is also becoming part of their due diligence. So, it’s just not the attractiveness of the business model, but also lots of other things around ethics and governance.
Which sector in your view has handled this period better in relative terms?
Fintech and environment tech. India is an attractive destination for fintech investments mainly due to widespread adoption of digital payments and rising internet penetration across the country. The government continues to push for a cashless economy in both rural and urban areas and this has supported the growth of the sector within the country. The rise of this sector can be mainly attributed to the growth of the electric vehicles sector in the country, with rising EV adoption and favourable government policies that push for cleaner mobility.
It’s going to be a year since you came out with the IPO. What does the road ahead looks like?
We are happy that we could come out with the IPO in the first 10 years of starting the company. We always thought that the Indian public markets liked profitable stories. So we started preparing for the IPO when we became cash flow positive. We see the IPO has sort of a platform to build the company for the next three decades. Our business is a global business. More than 60 per cent of our revenues are international. It’s great to have that India cost advantage.
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