Start-up founders are bracing for a tougher fundraising environment in 2023 as global economic conditions remain unfavorable and focus shifts towards profitability over growth. They are putting off or dropping their global expansion plans, reveals a report by venture debt firm InnoVen Capital.
Over half of the founders surveyed (58 per cent) believe that the fund-raising environment will be much tougher in 2023. While commerce, fintech, and enterprise SaaS founders had the most favorable experience in 2022, consumer brands and fintech founders are the most optimistic about 2023 funding environment.
An increasing amount of founders (41 percent in 2022, up from 27 per cent in 2021) consider the ability to provide follow-on funding as the key factor in choosing a lead investor. Indian start-ups’ global aspirations have also taken hit. Less than half of the surveyed founders (49 per cent) plan to grow outside the Indian market versus 61 per cent which had overseas expansion plans in 2021.
About 29 per cent of the surveyed founders ranked edtech as the most overhyped sector followed by crypto (17 per cent) and fintech (15 per cent) while healthtech and agritech (11 per cent each) were chosen as the most under-hyped sector. Profitability gains significant importance unlike prior years when growth was a priority, the study finds. For the first time in seven years, founders had higher bias for profitability over growth as 55 per cent of the surveyed founders stated profitability as a bigger focus area, compared to only 17 per cent in 2021. About 19 per cent of founders claim to be EBITDA profitable, while 62 per cent aim to turn EBITDA profitable in the next 2 years, up from 51 per cent last year. In growth/late-stage, 70 per cent of founders have higher focus on profitability, significantly up from 14 per cent in 2021 while in early stages, bias for growth has slowed down to 67 per cent in 2022, from 80 per cent in the previous year. Profitability and product market fit are top two priorities for founders in 2023. Despite the recent volatility of tech stocks in the public market, Indian founders are increasingly looking towards a domestic Initial Public Offering (IPO) as the likely mode of exit. Majority of founders (63 per cent) chose a domestic IPO listing as the most preferred exit option compared to 58 per cent in 2021.
Expected timeline for exits for most founders is in the 3–5 year horizon. In growth stages, only 15 per cent of founders expect an exit event in next two years while 22 per cent is unsure on exit timelines. Hiring is expected to slow down with just 38 per cent of founders expecting a higher pace of hiring, predominantly in early-stage companies. Enterprise SaaS and Agritech founders were the most bullish on hiring. The survey also highlighted that hiring good talent is still a challenge for founders. Improving gender diversity continues to be a challenge and trends remain largely in line with last year. 67 per cent of the companies have fewer than 20 per cent women in leadership roles, and 38 per cent had fewer than 10 per cent women leaders.
The report surveyed 120 founders across sectors and stages of which 61 per cent run growth/late stage companies and 39 were early-stage companies.
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