Startup founders focus on profitability, hope for higher valuations: InnoVen Capital report

• For the first time since the survey’s inception in 2015, profitability emerged as the number one priority for founders.
  
• About 58% of founders expect 2023 to be challenging, as per InnoVen Capital’s India Startup Outlook Report.
  
• Hiring is expected to slow down with only 38% of founders expecting a higher pace of hiring, predominantly in early-stage companies.
  

A majority of Indian startup founders are optimistic about getting a higher valuation for their companies in their next round of fundraising despite a tougher environment as they tighten focus on profitability.

The 8th edition of venture debt firm InnoVen Capital’s India Startup Outlook Report has found that 58% of founders it surveyed expect 2023 to be challenging, with a tougher fundraising environment.

“Despite the market slowdown, most founders are optimistic about raising their next round of capital at higher valuation. 75% of respondents expect a higher valuation than their last round, with fintech being the most bullish of being able to raise an up-round (96%),” the report said.

Funding winter’s silver lining: Focus on profitability

For the first time in seven years (since the survey was begun), founders had higher bias for profitability over growth – 55% of founders stated profitability as a bigger focus area, compared to only 17% in 2021.

“An overwhelming majority (85%) of founders identified that focus on more sustainable business models has been the most important impact of the current funding slowdown. Tightening funding environment has also led to an increased focus on profitability and unit economics,” the report said.

The survey said 19% of founders claimed to be profitable at the EBITDA (earnings before interest, tax, depreciation and amortisation) level, while 62% aim to turn EBITDA profitable in the next two years, up from 51% last year.

“2022 was a challenging year for the start-up ecosystem with an end to cheap money, rising interest rates and a challenging geopolitical environment. The positive aspect of the slowdown has been an increased appreciation for building sustainable business models,” Ashish Sharma, managing partner, InnoVen Capital India said.

The survey found that 53% of founders who attempted to raise funds in 2022 had a positive fundraising experience, although the number was down from 92% in 2021.

Also, founders are increasingly looking towards a domestic IPO as the likely mode of exit, despite the recent volatility in the stocks of listed tech companies. Majority of founders (63%) chose a domestic IPO listing as the most preferred exit option compared to 58% in 2021.

Hiring to be slow, gender diversity an issue

In terms of sectors, the report found that edtech was seen as the most overhyped sector, while healthtech and agritech were chosen as the most under-hyped sectors.

Edtech was severely affected as children returned to school after the pandemic, slashing the need for virtual classes. About five edtechs shut down in 2022; edtech company BYJU’s fired about 1,000 employees in January in addition to the over 2,500 employees it laid off in October last year.

For the startup sector, the hiring scenario has been as grim as the funding winter. According to job losses tracker Layoffs Tracker, 228 tech companies have laid off over 1.1 lakh employees globally in January 2023 alone.

In India, Wipro, GoMechanic and Swiggy led the tech layoffs during the same period.

Innoven’s survey does not offer a lot of good news on this count. Its survey found that hiring is expected to slow down with only 38% of founders expecting a higher pace of hiring, predominantly in early-stage companies.

“Enterprise SaaS and agritech founders were the most bullish on hiring. Improving gender diversity continues to be a challenge and trends remain largely in line with last year. 67% of the companies have fewer than 20% women in leadership roles, and 38% had fewer than 10% women in their leadership team,” Innoven said.

Zerodha is most admired

Innoven’s India Startup Outlook Report found that Nithin Kamath and Nikhil Kamath, founders of online brokerage firm Zerodha, were India’s most admired startup founders. Their company was also chosen as the most admired Indian startup, for the third year in a row.

The report is based on insights gathered from over 120 Indian start-up founders across stages and sectors such as fintech, SaaS, D2C, logistics, ecommerce, healthtech and others.

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