Funding winter for startups likely to thaw this year

Companies like Oyo, Ola Electric, FirstCry, Lenskart, Ixigo, OfBusiness, Urban Company, Swiggy are some of the startups that are aiming to go public in 2024. . (Mint)
Companies like Oyo, Ola Electric, FirstCry, Lenskart, Ixigo, OfBusiness, Urban Company, Swiggy are some of the startups that are aiming to go public in 2024. . (Mint)

Summary

  • The new year will likely see a flurry of investors coming in to back companies, and funding rounds of Series A and beyond are likely to gain traction

MUMBAI : Venture capitalists, who had turned cautious amid last year’s high interest-rate regime and frothy valuations of startups not backed by fundamentals, are likely to return in 2024, betting on early-to growth-stage entities in their pursuit of the next set of winners.

The new year will likely see a flurry of investors coming in to back companies, and funding rounds of Series A and beyond are likely to gain traction, industry experts and investors said.

“There is adequate capital available, at least for the India opportunity. Over the next 2-3 years, we’ll see $15 billion of dry powder being invested. I think there has been a nice 20-30-40% correction in valuations, and the deal volumes have not gone down," said Prashanth Prakash, partner at Accel in a recent interview with Mint.

Valuations have become reasonable, which will now kickstart the deal cycle again. “I think there has been a right-sizing of the valuations, having a series A round or a seed or a pre-seed round, be of the right size, and have the right valuations. I do not want to see that change. I think where we need more capital is at the growth stage. But I think what we should see, and hopefully we’ll see a bit more of, is focused pools of capital come in for early growth and create that entire spectrum, which is very different from the capital that was there because it was there for a different class of companies," Prakash added.

Investments by private equity and venture capital funds totalled $27.9 billion last year, a substantial 40% lower than in 2022, data from Venture Intelligence, a private equity-venture capital data provider, shows. This data is updated till 20 December 2023.

In 2023, the VC funds also cashed out to return money to their limited partners. Around $3.5 billion was returned through 79 exits in 2023, compared with $3.1 billion in the year prior.

As mature startups head to the public markets, we would see some realignment of their capitalization table in 2024, with early backers making way for long-term investors. These investors are likely to make manifold returns on their investments, either through the pre-IPO deals or through OFS. Companies such as Ola Electric, FirstCry, Lenskart, Ixigo, OfBusiness, Urban Company, Oyo, Swiggy are some of the startups that are aiming to go public in 2024.

“As liquidity returns globally and the public markets rebound in the OECD, we should see a gradual uptick in private market activity as well. While early-stage VC activity stayed relatively consistent over 2023, mid and late-stage investments were certainly down. We should see them reactivate over 2024, as they respond to highly positive signals from Indian IPO demand," said Pranav Pai, managing partner, 3one4 Capital.

Firms that raised capital during the covid-fuelled era of cheap money in 2021 had to trim costs and restructure their business models to become sustainable after the pandemic subsided, and capital costs crept up. While most startups slashed marketing spends, others laid off employees. Also, some either shuttered or sold non-core businesses to focus on their core operations. As the focus of growth-stage firms shifted from fund-raising to stronger unit economics and profitability, they have become investible. “The enhanced discipline of several sustainably growing late-stage Indian startups is also a positive sign that should attract global investors into the country," Pai added.

India has a much higher weightage from global investors, raising optimism about larger inflows, the experts said.

In terms of funding activity, 2023 marked a period of consolidation following the build-up and exuberance from late 2019 to mid-2022. As we transitioned away from the zero interest rate policy era, investors adjusted their approach, shifting from a growth-at-any-cost and early-leadership perspective to a focus on business fundamentals, positive unit economics, and profitability. Thus, quality companies that had raised capital in the past three years refrained from seeking additional funds, while laggards struggled to attract capital at even discounted valuations, said Karan Sharma, MD, co-head, digital and technology investment banking, Avendus Capital.

“...we anticipate this year as a precursor to an exciting growth phase," he said. India presents a five-year growth outlook, and the abundance of dry powder, narrowing valuation gaps as businesses grow, may attract big capital, reversing the trend of the last year and a half, Sharma added.

Sharma expects several tech leaders to go public, with the overall confidence poised for further enhancement. “We foresee the next three years as defining for the industry, anticipating a shift in the tech ecosystem towards achieving a trillion-dollar milestone," he added.

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