Indian startups see 70% drop in funding in FY23, focus on profitability: Redseer

Funding to Indian startups dropped 70% to an estimated $15 billion in FY23 from $50 billion in FY22, in a gradual onset of funding winter over the subsequent quarters, showed a report by Redseer, a strategy consultancy firm.

According to the report, the rising cost of capital and interest rates, the crisis in developed markets, a drop in the value of IT companies, and a slowdown in consumer internet growth posed obstacles to long-term funding. As a result, startups are concentrating on accelerating their path to profitability and lowering burn rates.

Moreover, the report also notes that there are only approximately 400 publicly traded companies with a market valuation of more than $1 billion while there are about 100 unicorns. Although technology substantially impacts the economy, there's a risk of overvaluation in the startup scene.

In 59 per cent of private companies, the stake of founders in startups is also restricted to less than 20 per cent, as compared to public enterprises, where it is more than 50 per cent in 65 per cent of public companies.

Commenting on profitability, Mohit Rana, Partner at Redseer, drew parallels between India's listed technology companies and their global peers.

Listed tech companies have made significant improvement over the last five quarters. Paytm launched new products, expanded into new business segments, and upsold/cross-sold to existing customers to increase revenue per customer and reduce customer acquisition cost (CAC). Zomato increased take rates from restaurant partners and delivery costs from customers. A similar path to profitability has been observed from global peers as well. Uber increased take rates to 28 per cent in 2022 - an increase from 15 per cent in 2021, reduced incentives to drivers, and expanded revenue streams. Airbnb optimised and maintained cost discipline in workforce & marketing and increased fees from guests and hosts.Mohit Rana, Partner at Redseer

Rana further emphasises that when startups go through turbulent times, boards must ensure future alignment and assume greater responsibility for assisting and supporting founders during tough times.

Profitability hopes

Based on Redseer's analysis of 100 unicorns, it is predicted that profitability would significantly improve over the next four years, with the number of profitable unicorns expected to increase from 30 in FY22 to 55 in FY27.

According to strategy consultants at Redseers, 50% of unicorns are predicted to become profitable by FY27, while the remaining 20% will likely struggle because of regulatory obstacles, falling demand, and unclear business models. They also expect that some of the struggling unicorns will transition to other business models, get bought, or go out of business entirely.

On the bright side, strategists believe that profitable unicorns in India might produce 5X the profit in FY27 as they did in FY22. FinTech and financial services, B2B, SaaS, and eCommerce are the top four sectors predicted to produce the biggest pool of profit in the next few years.

They also anticipate a drop in corporate losses during this time. Many of these negative margin enterprises, on the other hand, are projected to suffer funding adjustments, a decline in valuation, and a shift to a considerably lower growth trajectory.

Rana said the path to profitability is increasing revenues while cutting expenditures. While increasing ad revenues, backward integration, and margins/take-rates might boost revenue, lowering CAC, returns, and customer service expenses can reduce operational costs. He mentioned, “Many players are focusing on increasing their share of the digital ads market, which has a significant opportunity to drive revenues.” In terms of cost-cutting, he added, "Players can further reduce customer service costs while maintaining a high CSAT score, only 10 per cent of companies have optimised their spend while maintaining a good CSAT."