2023: The year that startups started to grow up

• VC funding reduced by 73% in 2023, pushing startups towards sustainability.
• Unicorns like Byju’s, Swiggy and Ola saw valuation markdowns, few others shut shop.
• Founders shifted focus to profitability and 18% of them said they’re profitable in a survey.
• Half of India’s 100 unicorns could turn profitable by FY27, predicts Redseer.
  
  

The year of 2023 was tough for many startups which had to survive without the VC funding bottle. A few like Frontrow, CarDekho shuttered down, while the fate of others like Dunzo hangs in balance. But most others also learnt their lessons, changing tracks to profitability from growth — proving that startups are agile and maturing.

Only $7 billion was raised by startups in 2023 – barely a quarter of 2022’s funding.

While the public markets remained vibrant, they were unrewarding to ‘profitless growth’. So, PharmEasy and Udaan had to delay IPO plans, to raise private capital.

VCs too changed track from betting on fast-growing startups to those that live up to their value. So, only two startups turned unicorns in 2023 – Incred Finance and Zepto. Also, a few large unicorns like Swiggy, Ola and Byju’s had to swallow the bitter pill of valuation markdowns.

“Startups were valued differently when there was excess liquidity in the market. Earlier the metrics used were month-on-month growth etc. Now they are using metrics like operating margin, revenue, profitability,” Anas Rahman Junaid, managing director of Hurun India told Business Insider India.

Breakeven not burn

Most founders have moved to fix their problems. As many as 18% of founders in an Elevation Capital survey said they are already profitable. An additional 58% said that they’re aspiring to achieve it in the near to medium term.

“Founders are emerging more resilient and wiser from these challenges, reinforcing positive shifts across funding, talent acquisition, profitability and liquidity events,” said Mridul Arora, partner at Elevation Capital.

A few that raised large funds this year like Udaan went in for immediate job cuts. It indicates that the process of belt tightening will go on, even as over 20,000 startup jobs were cut this year. Moreover, 38% of founders in the survey also said that they cut marketing costs and 20% of them also significantly reduced engineering and product development expenditures.

As many as 45% of consumer sector founders are focused on managing burn, the survey says. Also, 55% of B2B & SaaS founders are attempting to handle longer and more challenging sales cycles. The motto of ‘growth at all costs’ is fast vanishing from the startup system, say experts.

Public markets will open

The year of 2023 was a ‘do or die’ year for startups. As per Redseer, half of India’s 100 or so unicorns face bleak future like a shutdown, acquisition or pivot to new models. But half of them could turn profitable by FY27, it predicts.

Moreover, at least 30% of India’s unicorns will go for an IPO in the coming fiscal year of FY25. These 30 unicorns which cut across sectors like SaaS, B2C product companies, fintechs, media and entertainment and others — have sizable revenues of over ₹500 crore. It also says that India could have 40 listed or IPO-ready new-age companies, which can grow to 90 by FY28.

That’s a good exit option for VCs and PEs which have taken valuation cuts of their investee companies. “There’s a large headroom for value creation in the tech space. The scenario looks similar to what was seen during the US tech bubble as tech IPOs grew by three times as much, in the years post the dot-com bubble,” says Rohan Agarwal, partner at Redseer.

Before that, however, unicorns and other startups will have to pass the profitability test. “The question that has to be asked now is not when to go for an IPO but why go for an IPO? A sustainable company that survives on its own. They need sustainable business models like path to profitability, predictability of revenues, profits, new areas they are venturing into,” Amarjeet Singh Makhija, partner at PwC.

The new year will be a litmus test for startups- time will tell how many will emerge successful, and how many will quit the game.