Mumbai: While 2018 saw the funding environment for startups improve significantly, 2019 is expected to be more challenging than previous years, venture debt firm InnoVen Capital said in a report.
The InnoVen Capital India: Startup Outlook Report 2019, which surveyed around 100 founders and senior leaders across early-stage, growth-stage and late-stage startups, found that 46% of the respondents believed the startup funding environment would be more challenging. In contrast, 74% of the respondents said they had a favourable experience in 2018, up from 54% in 2017.
Chinese and Japanese investors are increasingly becoming popular, with more than 50% startups engaging with them before their funding. About 40% respondents also said they engage with private equity funds.
The fallout of a better 2018 in terms of fundraising activity is that startups are prioritizing growth over profitability. According to the report, 85% of respondents ranked growth higher than profitability as a focus area for 2019, a big jump compared to the 53% in 2017 and 56% in 2018.
The report said profitability seems to be concentrated in enterprise tech startups, 45% of which are already profitable. Enterprise tech startups tend to be profitable sooner due to the nature of the business, which comprises low advertising and brand building spends.
Growth- and late-stage startups are increasingly viewing initial public offerings (IPOs) as a viable exit route. “While 63% respondents expect an exit within 3-5 years, 85% of growth/late stage startups expect to provide an exit within 5 years, with 62% of choosing an IPO as a likely exit," the report said.
Certain segments, however, prefer M&A deals: 70% of retail consumer brands and 43% of fintech startups believe M&A deals provide a better exit option.
Expanding to new markets and fundraising are the two biggest priorities for startups, the report added. For early-stage startups, achieving a better product-market fit is also a key priority, while e-commerce startups rated unit economics as their top priority.
While fundraising was a priority, it was also the third biggest challenge for the respondents. Hiring good talent and ensuring growth were other major issues, it said.
Hiring talent is also expected to see an uptick, with 71% respondents looking to hire more in 2019 than they did in 2018. Logistics startups are the most bullish on hiring, while enterprise tech and media/content startups followed. However, 45% startups said that less than 10% of their workforce includes women in leadership positions.