70% drop in funding jolts startups into finding path to profitability

As startup funding declined by 70% from the financial year 2022 to the current year, Indian startups have been jolted into action to expedite their path to profitability and reduce cash burn. As per Redseer’s Path to Profitability report 2023, the Indian startup ecosystem is trapped amidst the funding winter.

While the industry experienced sharp funding growth during FY22 which amounted to approximately $50 billion, a gradual onset of the funding winter caused a massive drop to nearly $15 billion in FY23.

What caused this significant turnaround? As per the report, increasing cost of capital and interest rates, recession in developed markets, decline in the value of tech stocks, and the slowdown in consumer internet growth have all acted as barriers for sustained funding in the startups sphere.

As a consequence, startups are beginning to shift their goal posts to profitability and reducing burn rates.

Elaborating on private unicorns and publicly-listed companies valued at over $1 billion, Mohit Rana, partner at Redseer, says, “There are about 100 unicorns and less than 400 public companies with a market cap of over $1 billion. While tech has an outsized impact on the economy, there is also a tendency for overvaluation in the startup world. Ownership of founders in startups is also limited (0-20%) in 59% of private companies, as compared to public companies (50% +) in 65% of public companies.”

The strategy consultants' analysis also reveals that 50% of unicorns are expected to become profitable by FY27, while 20% are likely to struggle due to regulatory challenges, plummeting demand, and unclear business models. Some of the struggling unicorns could pivot to new models, get acquired, or shut shop entirely.

Discussing profitability, Rana says, “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 CAC. Zomato increased take rates from restaurant partners and delivery costs from customers.”

On a more positive front, the report predicts that profitable unicorns in India could generate 5x the profit in FY27 as they did in FY22. The top four sectors expected to drive the highest pool of profit in the coming years are FinTech and financial services, B2B, SaaS, and Ecommerce. During the same period, they also expect a decline in losses made by companies.

However, many of these negative margin companies are expected to see funding changes, a drop in valuation, and a move to a much lower growth trajectory.