There is no funding winter, just the long overdue changes are unfolding

Will the funding winter in India’s start-up ecosystem end this year? This is perhaps the most frequently asked question in India’s top start-up cities, such as Bengaluru, Delhi, Mumbai, and beyond. There have already been some prognoses that it may indeed be the case. While it would be hard to land on a very specific outlook, one thing is for certain.

The apparent paucity of funds may actually draw the proverbial silver line that will make India’s start-up ecosystem more strong and resilient than it is now. But is there really a funding winter because a closer look at the numbers seems to tell a different story? We had two fantastic years between 2021 and 2022 when our budding entrepreneurs collectively raised more than $40 billion and $20 billion, respectively.

But if we look at a larger block of seven to eight prior fiscals, we averaged around $12-14 billion a year, and 2023 was a tad lower at 10-11 billion. Of course it could have been better, but to brand it a funding winter based on a couple of recent windfall years is not very accurate. There also seems to be a general consensus that 2024 may see fresh funding to the tune of $12-14 billion unless we see a significant rise in the number of large deals (above $75 million apiece). Having said all that, we do need more funds.

For Chief Financial Officers (CFO), particularly in start-ups, keeping the machine well-oiled with abundant cash is our raison d’etre. I won’t be surprised if CFOs go to sleep staring at the poster on the ceiling that says “Raise More Money”. But the so-called ‘funding winter’ has also ushered in a new culture of financial prudence and long-term vision into the start-up ecosystem. So, the recent slowdown in the flow of funds has also added another poster on the ceiling that says “Save Money,” which means helping businesses achieve profitability with cost optimisation.

The first decade of the start-up boom was all about capturing the market or creating the market at the cost of profitability. However, the second decade is witnessing a change in the winds, with company boards and investors chasing profitability to build sustainable businesses. Today, our priorities are to lower CAC (customer acquisition cost), improve talent management, and adopt technology, such as automating internal processes, to help businesses hasten their journey towards profitability.

Recent developments in India’s start-up ecosystem have also brought in a lot of focus on strengthening regulatory compliance and corporate governance. In the absence of both, the cost of running a business is just too high and can potentially place a question mark on survival.

More specifically, it means strengthening the company board through independent directors and founders and investors taking collective responsibility for business decisions because hot or cold wars between these stakeholders are not helping anyone. The financial side of start-ups is also seeing a lot of transparency thanks to the recent surge in public listing, i.e., IPOs or Initial Public Offerings. Listing is the ultimate dream for every start-up founder.

Indian start-ups raised around $400-450 million in 2023 via the IPO route, with an estimated pipeline for raising $2-2.5 billion in 2024. However, a majority of these start-ups are far from profitability. But then again, there is a big challenge. Most of the listed start-ups have struggled to provide returns to the investors after listing, and a majority of them are trading below their listing day prices. Even though Indian retail investors are essentially conservative and are keen to invest only in profit-making companies, a new generation of investors has shown faith in the start-up IPOs and has been mostly let down.

So, it is time for start-ups to focus on profitability and start returning the favour to investors who have placed their trust in them. I believe Indian investors will remain bullish about new-age IPOs if we deliver our end of the bargain consistently. We have also shifted to a new and permanent phase where start-ups will have to raise funds at a valuation or structure that will not be on the same valuation metrics we applied in 2021-22 because it was the first post-Covid year, and investors were very high on growth prospects until reality hit us in 2022 and 2023, by failing to meet investor expectations.

But it is not as bad as it may seem. A good valuation is still possible. We can get our house in order and have a tangible growth plan with lower cash burn. If the mantra in 2021 was rapid top-line growth at the cost of profitability, it would be top-line growth with a path to profitability in the coming years. And that is a terrific silver lining and music to the ears of every CFO. 

 Tapan is the Chief Financial Officer at Scaler. Views are personal.  

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