Why 2023 was a difficult year for Indian start-ups, and why 2024 too looks challenging

First, how was 2023 for Indian start-ups?

Last year, Indian start-ups raised a total of $8.3 billion. This is the lowest they have raised since 2016, when there were much fewer of these firms.

Indian start-ups also saw a decline of 72% in the compound annual growth rate (CAGR) of funding in the last three years — a signal that the venture capital-fueled boom that followed the Covid-19 pandemic has ended.

In 2022, the country added 23 unicorns, which is the term used to describe private businesses with a valuation of over $1 billion. In 2023, only two firms could attain that status.

More than 20,000 people working at various start-ups lost their jobs in 2023.

A report by Nasscom and Zinnov said tech start-up founders cited cashflow issues, funding availability, and low customer demand as top challenges in 2023. At the same time, a number of firms cropped up hoping to ride the ongoing generative artificial intelligence (AI) wave — another trend that could see increased traction in 2024 as AI becomes more mainstream.

Where was the impact of the decline in fundraising the most?

The older firms struggled more. The biggest impact of the sharp decline in fundraising in 2023 was on late-stage investments, which, according to the Nasscom-Zinnov report, fell to 29% of the 2022 levels.

The decline in late-stage investments is primarily due to valuation cuts and the shift in the focus of investors towards profitability. There was also a significant decline in mega deal rounds from 42 in 2022 to 12 in 2023.

As funds struggled and a number of start-ups cut corners on corporate governance, investors became more cautious with their cheques to upcoming businesses. This is crucial because young start-ups depend on initial funding to streamline their processes and to devise go-to-market strategies.

The Nasscom-Zinnov report said seed-stage funding struggled in 2023 — Indian start-ups raised only $700 million in seed-stage funding compared to $1.2 billion in 2022.

Were there any sectors in which start-ups did better?

Funding in Indian automotive tech start-ups grew by 16% in 2023, resulting in a 4.5X increase in the sector’s share of total funding as compared to 2022, the Nasscom-Zinnov report said.

There was a 57% increase in mega-deal value in 2023 over 2020, with the deals primarily involving funding raised by EV manufacturers.

Start-ups in the supply chain and logistics sector also experienced a rise in deal value driven by funding raised by unicorns or almost-unicorns. Investors are betting on the growth of the Open Network for Digital Commerce (ONDC) ecosystem, which they hope will boost the growth of start-ups in the logistics space.

Though 2023 was a difficult year for tech start-ups, these firms increased their focus on business fundamentals, with nearly 60% of start-up founders reporting an increase in revenue and profitability in 2023, as per the Nasscom-Zinnov report.

Over 100 generative AI start-ups are now active in India’s start-up ecosystem, building horizontal and vertical applications.

How did India compare with the world in the start-up ecosystem?

India was fourth on the list of countries where businesses raised money, after the United States (where start-ups scored $113 billion in 2023), the United Kingdom ($17 billion), and China ($9.6 billion), as per a Tracxn report.

In 2023, 18 start-ups hit the bourses in India. On this list were Honana Consumer Limited, the parent company of beauty and wellness brand Mamaearth, and drone manufacturer ideaForge.

In the US and China, 34 start-ups each went public in 2023, the Tracxn report said.