Is Start-Up Funding About To Get Better?

The focus on governance, compliance, cash flows, unit economics, et al. is bringing back investors to the table.
Is Start-Up Funding About To Get Better?

The last 24 months have been very difficult for start-ups to raise funds. Funding declined by nearly 60 per cent from the highs of 2021. This, in hindsight, helped companies tighten their belts and become more capital efficient to ensure that their operations ran for a much longer time than envisaged. Companies, and I would say even investors, focused on growing the top line sharply but also ensured they watched the bottom line. It ensured that companies’ bottom line changed from red to black or moved rapidly towards profitability!

The focus on governance, compliance, cash flows, unit economics, et al. is bringing back investors to the table. There are several reasons:

  • Companies built on leaner models, emphasising scalable businesses with growing top lines and bottom lines

  • The Indian start-up ecosystem is sitting on $20 billion of dry powder, which needs to be deployed.

  • Tech salaries are more affordable, and companies are becoming better at retaining their teams.

  • Talent is choosing to stay with their current jobs rather than the massive job hopping we saw two years ago.

  • With the Indian economy tracking extremely well in comparison to other economies, it is the shining star to attract investments.

All of the above is an excellent opportunity for early-stage investors to invest in innovative companies solving real problems and create assets for growth or PE funds to come in as they, hopefully, open up their coffers later in the year or next year.

Also Read: Start-ups In India Grew Over 300 Times In Ten Years: Union Minister Jitendra Singh

We are already seeing increased momentum in start-up funding: the first quarter has already achieved more than 25 per cent of the amount raised in 2023. This bodes well for the overall health and vibrancy of the start-up landscape, fostering innovation, job creation, and economic growth in the coming years.

If the trends seen in the first few months of 2024 continue for the rest of the year, the amount of money invested in early-stage start-ups could surely be greater than what India saw in 2023.

Additionally, debt, both from private and public debt providers, has started to open up. Several companies have raised sizeable non-diluting monies on soft terms, which is really helping start-ups in hardware, manufacturing, space, etc., and is helping India build the Hon. PM’s vision of “Atma Nirbhar Bharat.” 

Sectors to remain in focus

Within the vast expanse of opportunities, certain sectors are emerging as focal points for investors. With the wave of increasing digital adoption among consumers, several sectors, apart from fintech, regtech, and legal tech, have opened up. Healthtech and biotech have started to evince huge interest, including in precision medicine and robotic surgery. Agritech has started slowly but surely innovating India’s agribusiness sector. The emergence of AI and GenAI will not only innovate many sectors but will also drive the growth of edtech, with a focus on skill upgrading.

We have seen companies like NOCCARC, which not only pivoted from cleantech to healthtech to build a smart ventilator to not only help patients but also pro-tech health care providers. NOCCARC is now building a portfolio of products for the ICU, leveraging breakthrough technology while building enviable revenues.

Chakr, a manufacturing tech product to reduce pollution, moved the needle from such products being “need to have” rather than “nice to have” with policy level changes nationally.

Dhruva Space, a fast-growing spacetech company with a full-stack offering of satellite platforms, launch solutions, and ground stations, has had five successful missions with ISRO, which is now attracting global players.

All of these are Indian companies. This would have been unimaginable 10 years ago. The founders of such companies represent the confident and persistent Indian entrepreneur with a conviction to be the best in its space globally. It is these entrepreneurs who are building the New India and attracting Indian and foreign capital and markets.

The Indian Start-up Ecosystem

In the quest for capital, start-ups are exploring diverse avenues beyond traditional funding channels. While venture capital remains a stalwart in the start-up funding landscape, alternative models such as crowdfunding and corporate venture capital are gaining traction. Crowdfunding platforms provide start-ups with an avenue to engage directly with potential backers and garner support for their ventures. Additionally, corporate giants are increasingly establishing venture arms to invest in start-ups that offer innovative solutions aligned with their strategic objectives.

 With strong businesses drawing increased attention from investors, there's a noticeable uptick in competition for funding opportunities. I've observed a rise in both the number of investment offers and the valuations attached to them, indicating a resurgence in investor interest. This heightened competition among funders suggests that the funding landscape is becoming more favorable for entrepreneurs. As competition intensifies, we can anticipate a potential upward trend in investment activity, offering promising prospects for start-ups seeking capital to fuel their growth and expansion initiatives.

We have seen in the past few years that the challenges in global macroeconomics have heightened investors’s scrutiny, purred by instances of corporate governance lapses in various start-ups, which have led to a decline in deal volumes. As we enter the new year, both founders and investors are placing greater emphasis on governance practices. This shift reflects a growing recognition of the importance of strong corporate governance in building trust and sustainability within the start-up ecosystem.

By prioritising governance, founders can instill confidence in investors and mitigate risks, while investors can make more informed decisions to support start-ups with robust governance structures. Thus, while the challenges of the past year have prompted a reassessment of priorities, this renewed focus on governance is poised to drive positive changes and foster a healthier investment environment for start-ups in the coming year.

Written by Padmaja Ruparel, Co-Founder at Indian Angel Network

(The opinions presented belong solely to the author.)

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