Startup ecosystem resilient enough to drive growth despite turbulent 2023

New Delhi: Despite facing global challenges in 2023 like valuation issues, few IPOs, regulatory changes and macroeconomic and geopolitical trends, India remains the third largest tech start-up ecosystem globally, with over 950 tech startups founded last year.

Although some of the startups/unicorns are currently facing a liquidity crunch amid layoffs – like Byju’s -- most of the ecosystem is still performing well and is aiming to scale operations while preserving cash.

More than 1.14 lakh startups in India have created over 12 lakh jobs so far, the Finance Ministry said in its latest review of the Indian economy.

In the report titled, ‘The Indian Economy: A Review January 2024’, the Department of Economic Affairs said that the 1.14 lakh startups recognised by the government under the 'Startup India initiative’ created more than 12 lakh jobs (as of October 2023).

The cumulative funding for more than 31,000 tech start ups has exceeded $70 billion (from 2019 to 2023), according to a recent report by Nasscom in collaboration with Zinnov.

“In 2023, despite facing global economic and regulatory challenges, Indian tech startups have prioritised the imperative of enhancing their business fundamentals, driving profitability and growth,” according to Debjani Ghosh, president, Nasscom.

“The proliferation of tech startups in tier 2 and 3 cities marks the ecosystem's resilience,” she added.

Navigating 2024, tech startup founders expect to continue the revenue growth path with measured steps focusing on optimising expenditure and maximising profitability for B2B tech startups.

Investments in deeptech will continue an upward trend in 2024. With generative AI (Gen AI) acceleration, 70 per cent of start-up founders are embedding artificial intelligence (AI) in their solutions.

As funding becomes scarce for the Indian startup ecosystem in general, the explosion of Artificial Intelligence has given a new lease of life to entrepreneurs and founders in the country, as the Centre extends support to the sector.

India's fintech sector saw funding plunge 63 per cent in 2023 -- at just $2 billion -- from $5.4 billion raised in 2022.

InCred was the only unicorn created in 2023, while the fintech sector saw 31 acquisitions and two IPOs. Only five $100 million+ funding rounds took place last year, according to the latest report by Tracxn, a leading market intelligence platform.

“Despite a 63 per cent decline, the fintech sector stands strong as the third-highest funded ecosystem globally, affirming its position as a hub of innovation. The implementation of regulatory measures and the government's commitment to digitalisation have set the stage for a promising future,” said Neha Singh, co-founder at Tracxn.

Alternative lending, payments and banking-tech were the top-performing segments in the Indian fintech sector. Alternative lending received a funding of $835 million in 2023, down from $2.28 billion in 2022.

The BNPL segment saw significant growth due to its adoption within the country, which contributed to the growth of the sector.

The value of investments by Private Equity - Venture Capital (PE-VC) firms in India fell by 38 per cent to less than $30 billion in 2023. PE-VC firms invested $29.7 billion (across 756 deals) in Indian companies in 2023, compared to $47.6 billion (across 1,362 deals) in the previous year, as per Venture Intelligence.

The year 2023 witnessed 67 mega deals ($100 M+ rounds) worth $21.2 billion, compared to 112 such investments worth $31.8 billion in 2022.

“While large ticket PE investors focused their attention towards sectors like healthcare, financial services and infrastructure, 2023 saw the slowdown in growth- and late-stage investing trickle into the Venture Capital segment as well,” according to Arun Natarajan, Founder of Venture Intelligence.

“Towards the year end, on the back of strong public markets, private markets received a dose of optimism, which also translated into a few large growth stage tech investments going through,” he added.

In a respite for the startup ecosystem, the Centre has announced in the Interim Budget to extend tax benefits for startups and investments made by sovereign wealth and pension funds to March 2025.

Certain tax benefits to startups and investments made by sovereign wealth or pension funds as also tax exemption on certain incomes of some International Financial Services Centre (IFSC) units are expiring on March 31 this year.

As many as 2,975 government-recognised startups have been granted Income Tax exemptions so far, according to the Department for Promotion of Industry and Internal Trade (DPIIT).

Under the ‘Startup India’ programme, the government provides Income Tax exemption.

In September last year, the government notified new angel tax rules that comprise the mechanism to evaluate the shares issued by unlisted startups to investors.

Startups registered with the DPIIT were exempted from the new norms. The government highlighted that the exemption will benefit over 80,000 startups.