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A few weeks ago I attended the ET Startup Awards in Bengaluru, an event renowned for reflecting the mood of the startup ecosystem. It also paints a picture of whose stars are shining and whose have dimmed.
Predictably, there was plenty of chatter about the funding winter and layoffs, and I chanced upon many an “I told you so”, while meandering through the crowd. This compelled me to share some perspective on the ground reality of the current funding scenario.
Many founders I meet these days seem to be staying away from the limelight and are focusing all their energy on their business. Most smart founders are sitting on a neat stash of cash they raised in 2021 and focused on getting their businesses back in great shape.
We have witnessed this before – in April-June 2020.
Clearly, there is plenty of dry powder in the market and solid companies are getting a great reception, but the bar to invest is higher. Investors are eager to put money in companies that are either profitable or close to break-even.
They prefer companies with clearly established unit economics and a clearly defined path to profitability. There are a few upcoming sectors where investors are ready to take a leap of faith when it comes to profitability, but that luxury is not available to companies in established sectors that have been around for a long time.
So, what can we expect from dealmaking in 2023?
There are a few things that are working in favour of the ecosystem. India’s place in the global economy is attracting a lot of attention. The country's economy is better off than other major economies, its consumption indicators and credit-offtake indicators are pointing in the right direction, and policies seem to suggest that this trend could continue for a while.
This includes Main Street, which is demonstrating robust growth, including a strong bounce-back of physical-only models in a post-Covid-19 world.
Digital companies have adopted the phygital model where necessary, and are equally poised to take advantage of growth coming from both digital and physical execution.
Government initiatives in fintech, healthtech as well as the likes of ONDC will further democratise the digital economy and bring mainstream players into the ecosystem. For companies that are made in India for the world, their cost competitiveness, while maintaining high quality, will earn them good business.
Indian capital markets have performed well, too.
Though listed tech companies have suffered a hit in valuations due to industry factors and some company-specific factors, their value erosion is much less than what investors have witnessed in other markets.
Their performance and investor reactions will play an important part in the ecosystem’s ‘lessons learnt’ doctrine. All these factors point to active fundraising in 2023.
If we were to split the fundraising universe into three categories, here’s what it would look like:
Companies that raised capital in 2021 but did not access the market in 2022: These companies were well-funded but had valuation concerns. Many of them are focused on getting into leaner shape and establishing a solid case for a path to profitability.
Irrespective of the valuation, they will have to access markets in 2023. Hopefully, their performance has either brought them back to their past valuations or surpassed them. We have done quite a few deals this year in which companies that are performing well have seen premium valuations.
Companies that are either profitable or well-capitalised: These companies don’t see the need to raise primary capital. However, early investors will want liquidity. Rather than allowing multiple bi-party conversations, smart founders will ensure that there is a structured secondary process for their early investors.
Given these companies are marquee, well-capitalised companies, there will be significant demand for secondary transactions.
Companies that need capital urgently: Unfortunately, these companies were not able to fix their business models or cost structure to show a strong path to profitability. They will struggle to convince investors – both on the merits of the fundraise and the valuation.
Their internal investors will have to play an active role and provide them with some cushioning. These companies will be price takers in the market.
Other than this, some IPO-ready companies will revisit their listing plans if the founders are ready to face post-listing volatility. Based on my conversations, it seems there are only a handful of founders who really want to go down that path.
Overall, the private capital raising environment in 2023 will be robust and show significant improvement over 2022. However, the capital will be directed to a smaller universe of companies than in 2021.
(Article first published by ETtech)
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