“In the short to medium term, we are seeing businesses pausing growth and even allowing for shrinkage to weed out unsustainable and harmful elements,” said Sheetal Bahl, a partner at Merak Ventures. However, he added that this is not a permanent shift.
“Once startups consolidate their positions, they’ll refocus on growth, but in a more calibrated manner… It’s a sign of a maturing ecosystem where long-term value trumps short-term hype,” Bahl said, citing examples like Cosmofeed, a creator-focused platform founded in 2021 that has sharpened its sales focus to acquiring high-margin customers and revisited internal processes to increase productivity and reduce costs.
Private markets in recent times have been forced to undergo a correction after a funding boom during the pandemic led to overvaluation of startups. Aggressive growth strategies fed by the funding euphoria did not bear fruit and, as a result, several startups had to pivot their business models to reduce burn or shut down operations.
According to Bain’s latest venture capital report, funding declined to $9.6 billion from $25.7 billion over the 2022-23 period. The report said funding had declined across sectors with mega-rounds plummeting by almost 70%, from 48 to 15 in the same period. This had led to a decline in deal volume from 1,611 to 880 deals in 2023 with average deal size shrinking to $11 million from $16 million, the report said.
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“Startups began several initiatives during the pandemic and the cost of marketing was extremely high. As things stand today, we are getting the sense that margins are more established and they are more focused on retention,” Rahul Chowdhri, an investor at Stellaris Venture Partners, said.
While growth parameters may vary based on the stage of the startup and the segment it operates in, Chowdhri outlined that on average, early-stage startups may need to show 3-4X growth a year, which can then decrease to even 50% growth at the time of exit.
While mid- and late-stage startups continue to grow, he anticipates healthier metrics such as positive unit economics that will help companies grow in a sustainable manner.
Producing sustainable growth
As growth is fundamental to venture investing, early-stage startups are expected to deliver prolific growth to show that there is potential for disruption in the market. “The ability to produce such outcomes is more possible today as every company in India has room to grow because of the overall expansion of the market, distribution channels and customer needs,” said Dipanjan Basu, co-founder at Fireside Ventures.
However, the growth becomes unreasonable when a company burns excessive money to acquire customers outside its target market, or gives discounts more than required, or aggressively expands beyond areas of specialty. “As companies scale, we definitely look for more sustainable growth (that enhances value without sacrificing financial health) that can be repeated every year,” Basu said.
Merak’s Bahl concurred. “Startups should aim for steady, incremental growth, ensuring their business models are resilient and adaptable to market changes,” he said, adding that this is a healthy reset for the market.
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The course-correction is also aligned with several series B-and-beyond-stage fund investors who ask for more reasonable valuations with a definite path to profitability.
“Mid and late-stage investors have continued to hold the discipline they had earlier. So, after a lot of excitement in the seed and series A levels, companies often don’t get investors who will write cheques for very high multiples as they get into growth rounds,” said Yash Dholakia, a partner at early-stage consumer-focused firm Sauce VC.
Mid-stage startups dangle between growth vs profitability
Meanwhile, a clutch of mid- and later-stage startups may see a slower pace of revenue growth as they look to improve unit economics and overall profitability in a bid to list in the public markets in the next 24-36 months, several industry executives said.
IPO-bound companies such as Infra.market, a business-to-business construction material supplier, and e-commerce platform Meesho are some examples of startups that are refocusing efforts to enhance profitability. These efforts may include expanding product catalogue and focusing on loss-making units to enhance profitability and grow to their valuations.
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Meat delivery startup Licious is another example of a startup that has seen a growth slowdown owing to the pandemic and is now focused on bettering its control over costs, as per a report by Moneycontrol.
Content-to-commerce platform Good Glamm also highlighted plans to achieve its target of profitability and improve revenue growth through international expansion as it looks to go public.
“There is greater importance on profitability today. Even across our portfolio, we have seen revenue growth slow down to 40-50% from the prior 80-100%. But at the same time, gross profits came in higher than expected as many of our companies started to churn out or shut businesses which were not profitable,” said Vikram Chachra, founder of early-stage venture capital firm 8i Ventures. The VC firm has invested in companies such as Blue Tokai, a coffee startup, and a host of fintech startups including M2P and Slice.
IPO Potential
With the funding winter showing some signs of warming and with the ease of going public in India compared to other countries, 8i’s Chachra said IPO has become a very attractive opportunity for founders across all stages today.
In India, a company typically must clock in about $100 million in revenue to tap the public markets while in the US, companies need to show at least $300 million revenue.
“Any founder who’s delivering above $10-15 million in revenue is seriously looking at how to IPO today,” Chachra said. He added that there is immense potential for companies to go public in a market like India that is deeply underpenetrated.
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While several startups such as Mamaearth, Zomato, Paytm and Ixigo have gone public, investors are also increasingly gravitating towards mid-market funds that target series B and beyond to facilitate faster growth and help startups pursue IPOs in a shorter time span, Chachra said.
Moreover, consumer companies in general are very well valued by the public markets and have unlocked great multiples. Public markets have shown sustained momentum with several new-age tech companies such as Swiggy, Ola Electric, FirstCry, PayU and Mobikwik expected to IPO by the end of this year.