Startups 2023: Will the funding winter & recession drag down VC sentiment?

The Tech Panda collected the thoughts of startups and VCs regarding the ongoing funding winter.

The funding winter that started in mid-2022 globally is starting to see its impact in India now and the next 6-9 months are being called extremely critical for startups. Already, the ground impact of this winter is visible in the US, where investors are adopting caution and negotiating on valuations till the storm settles down. Expectations are that the same trend will follow in India.

India saw a US$1.2 billion of venture capital deployed till October 2022 compared to US$3 billion in 2021, which is a 70% decline. Other stats such as number of unicorns minted etc. are also vouching for this. There are already signals of Fed rate hikes to 5.5% compared to current 3.75-4% by mid next year, which might lead to further currency depreciation and hence investing in India is likely to become unattractive, although temporarily.

Even though in the first half of 2022, the amount of funding in Indian startups was significantly higher, it was primarily concentrated in the early and seed stages. Around 596 early-stage startups raised funds in H1 2022 vs. the late/growth stage – which accounts for only 226 deals.

2022 has seen the trend shifting from growth at all costs to more sustainable growth. Both startup founders and investors have become cautious of high cash burn and have started focusing more on cost reduction and visibility of profitability or at least making businesses unit economics right.

What will 2023 bring for startups in India? The Tech Panda collected the thoughts of startups and VCs regarding the ongoing funding winter.

Atul Rai, CEO & Co-founder, Staqu

“The funding winter, which gained momentum in the fourth quarter of 2021, will still be felt in 2023, but startups will emphasize overtaking the slowdown itself by managing investments appropriately, streamlining operations and cost structures, and implementing aggressive monetization strategies.

The funding winter, which gained momentum in the fourth quarter of 2021, will still be felt in 2023, but startups will emphasize overtaking the slowdown itself by managing investments appropriately, streamlining operations and cost structures, and implementing aggressive monetization strategies

“To make this happen, startups from all industry verticals will deploy AI, ML, big data, and data analytics to enhance services and add a dynamic outlook to their client practices. For greater latency and predictability as well as minimizing decision risk across industries, existing AI models will also be fine-tuned to serve specific purposes which will be supported by the fresh infusion of capital by stakeholders.”

Namit Chugh, Investment Lead, W Health Ventures

“Startups need to build the core product, achieve metrics that will make the company lucrative once the funding winter is over; as there is ample dry powder in the country (US$ 16 billion dry powder).

It’s a great time to invest in pre seed/seed companies as capital required and cash burn – both are lesser

“It’s a great time to invest in pre seed/seed companies as capital required and cash burn – both are lesser. This will allow founders to build solutions that cater to the customer need, achieve a strong PMF and be ready to raise a round when the winter is over.”

Pankit Desai, CEO & Co-founder, Sequretek

“As far as 2023 is concerned, I am very hopeful & bullish that this trend will continue. There may be some moderation of sentiment, depending on how the global markets shape up but, if there’s an impact, it’ll probably be minimalistic.

As far as 2023 is concerned, I am very hopeful & bullish that this trend will continue

“There might even be a silver lining from this global recession perspective. We are hoping that the employee cost & churn that we are witnessing, specifically in the tech industry, should temper down a bit. This will allow companies to reduce the existing pressure on hiring and make it much more manageable.”

CA Gaurav VK Singhvi, Co-Founder, We Founder Circle

“Angel investors are always going to be around – no matter the year. Early-stage startup investment remains an attractive proposition for many investors due to its exponential growth probabilities.

Angel investors are always looking for an answer to the question – is there a good company to invest in?

“Investors desire to garb the first come opportunity to take the stake at a reasonable valuation and reap significant returns, and exit in Series A/B rounds or later. Early-stage investors have generated around 10x, 22x, 35x to 80 times returns also. So to answer your question – angel investors are always looking for an answer to the question – is there a good company to invest in?”

Neeraj Tyagi, CEO & Co-Founder, We Founder Circle

“We are looking at a lot of course corrections in terms of team restructuring, bridge fundraising, founders cutting their own salary cuts, removing perks & focusing on core business rather than trying multiple side products. And this trend will continue in 2023 also.

There’s no denying that funding has been a slowdown for startups, especially at the growth stage, but funding as a whole is not going to stop

“There’s no denying that funding has been a slowdown for startups, especially at the growth stage, but funding as a whole is not going to stop. In fact, those startups that were prioritizing profitability are getting centre stage and are hot favourites among investors.

“The funding winter seems to be a prolonged one and would probably extend for the first half of 2023, as the global market corrects itself further in the rising interest rate environment. However, startup funding is not likely to see any imminent pause, especially for early-stage ventures. From Tier 2/3/4, a huge inflow of new angel investors is on the rise and so seed to angel stage funding will see a lot of investments and the contribution of angel investors will be the most significant in overall funding in 2023.”

Sumeet Singh, Partner, Climate Angels

“The startup success story in India in recent years has unlocked huge opportunities and most importantly, it has opened new avenues for the emergence of startups that are innovative and purpose-driven. As humanity is facing the biggest threat of climate change that can bring billions of lives at risk, many new-age businesses are leveraging technology and a problem-solving mindset to minimize the impact.

“We are already witnessing major metropolises coming to a standstill, for instance, the capital city which is battling air pollution. These growing environmental concerns have not only paved the way for climate tech startups but have also increased their importance manifold.

Investors are increasingly stepping ahead to become a partner of climate tech startups that not only ensures business benefits but also links them to the larger cause of building a sustainable future

“Investors are increasingly stepping ahead to become a partner of climate tech startups that not only ensures business benefits but also links them to the larger cause of building a sustainable future. As per a recent report, USD 1.4 billion has already been invested in such companies. It also said there has been a steady increase in investment in this space since 2019. It is expected that in coming years, climate tech will emerge as the biggest disruptor and the early-stage ventures will attract investments for climate innovation. The VCs are actively supporting climate tech startups as they are aware of the market opportunities and the huge possibilities in technology and innovation.”

Navanwita Bora Sachdev

Navanwita is the editor of The Tech Panda who also frequently publishes stories in news outlets such as The Indian Express, Entrepreneur India, and The Business Standard