Startups Forecast 2023: Amidst Plausible Recession & Protracted Funding Winter
At the global startup scale, India is poised enough to weather this winter way more easily as most top-tier funds in the country have accumulated record funds this year, an indicator that we might witness intense investment cycles in times to come. As of 7 September 2022, India has emerged as the third largest startup ecosystem in the world, with 107 unicorns (startups with valuations of USD 1 billion or more) with a total valuation of USD 340.79 billion. The year 2021 witnessed a record set of 44 entries to the coveted unicorn club, even as many ‘soonicorns’ (soon-to-be unicorns) waited in line. The promising Indian startup ecosystem is, however, facing challenges attributable in part to current global macroeconomic conditions.
Looming Recession – A Boon Or Bane?
The equity markets have been volatile for some time now, thereby making investors more cautious about spending money. While this might not be a piece of good news for startups, it is definitely good news for investors as it will give them an opportunity to invest in startups in a more realistic way. Given the current nature of spending, there is a time lag when it comes to funding a startup from the pitching stage to evaluating (time spent here has also increased radically) to closing and resounding in the cash register. Consequently, fundraising rounds also take more time to close, thereby giving an investor ample time for evaluation. Yet another good thing for investors is that the slowdown has resulted in only the ‘best’ surviving. Therefore, the deals that come their way will be in the market for the long haul.
Reasons Behind Such “Funding Winter”
The reason for such a ‘funding winter’ is to be traced back to global macroeconomic developments, particularly shifting interest rate regimes between 2020 and 2022. As the pandemic hit, several central banks and especially the US Federal Reserve, with a motive to curb the worst effects of the pandemic, opted for easy monetary policies to ensure credit flow within the economy. These policies meant the use of both – unconventional and conventional monetary policy instruments.
Thus, Fed Fund rates were lowered by the US Fed signalling that other short-term rates to also be lowered. The Fed also provided forward guidance on the forward path of interest rates expected to boost spending by lowering the cost of borrowing for businesses and households. The Fed also provided forward guidance on the future interest rates in successive Federal Open Market Committee statements throughout 2020, clearly signifying that it would keep interest rates near zero.
Macro-developments And The Indian Startup Scenario
What do these macro developments mean for Indian startups? As interest rates rise, these hikes would ideally lower the valuations of startups, even if they are not exposed to debt and have used equity capital to finance their operations.
With 2023 coming, the depreciating rupee is also expected to impact startups that are struggling to raise funding in dollars or have already loaned out in dollars. In the case of the former, the depreciating rupee will affect their funding along with their valuation in the process. Secondly, their debts would become more expensive owing to the depreciating rupee. Such startups might not be in a position to implement circumventing strategies used by large corporations. Rupee depreciation is also expected to shoot up the operational costs of multiple startups, thereby affecting their margins in a negative manner.
The current year’s transformation within the global macroeconomic scenario calls for a change in the investment realm of Indian startups. The system’s efforts to reverse liquidity and rupee depreciation will push venture capital investors to prioritise profitability overgrowth. Companies with low valuations and for which funding at lower valuations are less attractive will need to look for options other than equity funding. Preservation of cash rather than cash burn may become the go-to mantra for Indian startups as we advance in 2023 amid such financial insecurity.
Over time, India has evolved into an international system and developing frameworks for its security and development. Building stronger strategic ties and stronger national interests with other countries, the recent past has been witnessing continuous growth and portrayed India as a geopolitical superpower. Currently, India ranks as the fifth largest economy in the world and has also scaled its rank by 23 positions in the World Bank’s Ease of Doing Business Report.
The Way Forward
India’s entrepreneurial DNA has experienced excellent traction over the past decade, with the country reaching the 46th spot in 2022’s Global Innovation Index, thus, becoming a part of the handful of countries that have consecutively improved its rank for over 10 years.
As India continues to take giant leaps in creating sustainable solutions across industries, the startup ecosystem will continue with its innovation and disruption cutting across sectors of health tech, space tech, fintech, and even femtech. Such a move is expected to bring humongous opportunities for startups as well as investors.
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