Sumangal Vinjamuri is AVP, Investments; and Sanjay Nath is Partner, Investments at Blume Ventures, an early-stage Indian venture capital firm.
The year 2023 has been one of dichotomies for the Indian startup ecosystem.
GlobalData reports that between Jan-Oct 2023, 920 deals were announced totalling $6.3 billion in funding in the Indian startup ecosystem. Contrast this with the same period in 2022, when 1,499 deals totalling $19.2 billion were announced—that’s a drop of nearly 67%.
Yet, even in this winter, the best companies proved that they can adapt and thrive. They navigated through these choppy waters by focusing on sustainable and ideally even sustainable, profitable growth by building robust foundations and focusing on capital efficiency.
We can all agree that the ecosystem as a whole has picked up lessons that will stay with us for years to come. The approaches of the “zero-interest-rate period” are unlikely to return as long as the last 12-18 months stay on in our institutional memory.
The growth of AI startups
While the overall funding activity has been lower than in the last few years, there is one bucket which was fairly immune from the downturn and, witnessed quite a bit of frenzied dealmaking—startups building in AI.
We’ve had a ringside view of this trend at Blume Ventures, and have quite a few thoughts, theses, and reflections as we close 2023 and head into 2024.
Developments in AI have led to heightened activity across the infra layer, development tools layer and the application layer of the stack. While each of these layers has immense potential to unlock large value, it is clear that the AI space is still in its nascent stages and evolving rapidly.
There are several incumbents (including Microsoft and Salesforce) who have moved fast on adopting AI and bringing its power to the enterprise as well. So, startups have their work cut out both in terms of building product moats and distribution.
We strongly believe that the real advantage for startups here lies in taking a radically new solution approach to existing problems of enterprises, rather than building incrementally better solutions as the incumbents are already ahead of them on that path.
Some froth
Given the excitement around the potential of AI, we have also broadly seen a lot of frothiness in investments in this space. A typical early-stage deal in AI does not look very different from a similar deal in 2020-21 both in terms of round sizes relative to the stage of the company (product buildout, traction etc) and in terms of valuations.
In this context, founders must remember that the higher the initial valuations, the higher the bar is (in terms of ARR milestones and growth rates) for the company to attract subsequent investments.
We’ve seen some entrepreneurs take a more thoughtful approach as well by raising smaller, building leaner, picking early “hero use cases” that work and are monetisable, and focusing on growing efficiently rather than “growing into” a valuation. These are still early days and we at Blume have our ears close to the ground to learn continuously, along with the broader ecosystem.
Will the winter be short-lived?
As we look forward to 2024, the broader macroeconomic outlook remains very promising. India’s economy is expected to reach a 6.5% GDP growth rate in the fiscal year 2024-25 and will hit 7% in 2026, according to the latest estimates.
The Indian digital economy, currently accounting for 11% of the GDP, is projected to make up more than 20% by 2026.
We’re on a steady upward trajectory towards becoming the world’s third-largest economy within the next 3-4 years. There is also significant dry powder of more than $20 billion held by India-focused funds which is ready to be deployed into startups.
As such, 2024 could be the year where we see more normalisation in broader investments, including a reduction in the frothiness of AI investments. We expect deeper integration of AI across various verticals, along with strong growth in multiple areas of deeptech including climate tech, health tech and space tech. The best performing and high-potential startups will still attract the most investment dollars, and the focus will continue to be on sustainable growth.
We see the tide turning in 2024
The story of India’s startup ecosystem in 2023-24 is more than just a tale of investments and numbers. It’s about resilience and the enduring spirit of entrepreneurship, and the transformation of AI as an enabler to enterprise, mid-market and SMB businesses at large.
It’s a narrative of overcoming challenges and marching towards a technology-rich and prosperous future, driven by long-term vision and capital-efficient growth.