Emphasis on Fundamentals in Indian Startup Investment: Analysis for a Layman
Source: ET Bureau article published on Feb 12, 2024 covering a panel discussion with top VC and startup founders.
Analysis for a Layman
With Indian startup funding down 70% in 2023, investors are shifting focus back to fundamentals when evaluating deals rather than relying solely on fanciful growth forecasts. Prioritizing profitability, realistic addressable market size, and experienced, humble founders over rapid expansion at all costs is becoming the norm. Leading investors on the panel, like Titan Capital’s Kunal Bahl, still back teams with positive unit economics even in early stages.
Impact on Retail Investors
- Market Analysis: Public market investors should analyze if listed internet/tech companies like Zomato, PB Fintech, Delhivery, etc., reflect some of these rational approaches in their communications now.
- Metrics Tracking: It’s also important to track reported metrics like revenue, margins, and cash burn rates rather than vague TAM and user figures.
- Investment Considerations: Provides a template for retail investors on what questions to ask before investing in unlisted tech startups.
Impact on Industries
Startup/Tech:
- Funding is still available but concentrated on high-quality teams and ideas over spread too thin, inviting professionalization.
- Course correction towards sustainable growth paths instead of cash burn for growth’s sake.
FMCG/Consumer Internet:
- Direct-to-consumer brands are set to grow with customized products tapping into specifications.
Long Term Benefits
- Rational Exuberance: Prevents excessive value erosion and protects external stakeholders when cycles turn.
- Healthy Ecosystem: Builds the foundation for a healthier tech ecosystem not dependent on endless capital supply.
Long Term Negatives
- Innovation Balance: Extreme cautiousness can impede truly innovative but unproven business models from emerging. Balance is needed.
Short Term Benefits
- Investor Wisdom: Investor wisdom trickling down for renewed emphasis on profitable progress over hype.
Short Term Negatives
- Job Losses: Funding winter means job losses, closures in excessively cash-burning startups now. Revenue models are being disrupted.
impact of Investor Priorities on Startups:
Disclaimer: This analysis is based on the provided information and may not capture all potential implications.
Companies Potentially Gaining:
- Early-stage startups with strong unit economics and defensible niches: Investors like Kunal Bahl (Titan Capital) prioritize these aspects, potentially favoring such companies in funding decisions. Positive sentiment for startups demonstrating these qualities.
- Startups with proven founders and execution track records: Investors like Namita Thapar (Shark Tank India) and Mukesh Bansal (Myntra/Cultfit) value founder experience and execution. Startups with strong leadership and a history of delivering could benefit.
- Impact-focused startups: Growing interest in impact investing highlighted by Namita Thapar could benefit companies with social/environmental missions alongside profitability.
Companies Potentially Losing:
- Late-stage startups with large TAMs but weak unit economics: Investors like Sudhakar Adapa (Bia Brands) emphasize profitability, potentially making it harder for such companies to secure funding.
- Startups lacking clear product-market fit or founder experience: Investors like Namita Thapar prioritize these aspects, making it challenging for startups without them.
- Startups in crowded or highly competitive markets: Investors looking for defensible niches might avoid such markets, impacting funding prospects for companies within them.
Global Companies:
- Limited direct impact: The article focuses on Indian investors and startups, with limited relevance to global companies unless they’re actively involved in the Indian market.
Market Sentiment:
- Overall cautious sentiment: The funding slowdown is expected to continue, with investors being more selective.
- Positive sentiment for startups meeting investor priorities: Companies demonstrating strong unit economics, defensible niches, experienced founders, and execution could see improved sentiment.
- Negative sentiment for startups not meeting these criteria: Fundraising challenges and potentially lower valuations are possible for such companies.