Right unit economics, profitability to drive startup ecosystem in 2024

After navigating the "funding winter" of 2023, the startup ecosystem may see a rebound in 2024, but only if startups maintain strong unit economics and prioritise profitability.

During a conversation at the India Global Innovation Connect (IGIC) 2024, Madhu Gupta Khandelwal, Managing Partner at EthAum Venture Partners, Singapore; Mikihide Katsumata, President & Chief Operating Officer, Innovation Network Corporation of Japan (INCJ); Abhay Maheshwari, Chief Financial Officer at Jupiter Capital, India; and Nruthya Madappa, Partner at 3one4 Capital, India, discussed how VCs are now renewing their focus on business fundamentals, leading to more cautious investments.

The current season is of “value over valuation” where Maheshwari said that the expectation of VCs haven’t changed from the point of view of company’s growth however, the focus has shifted from aggressive growth to sustainable growth.

The discussion also touched on the increasing prevalence of seed and pre-seed funding in the Indian startup ecosystem. Khandelwal and Madappa noted that the uncertainty brought about by the COVID-19 pandemic has reduced risk appetite among investors. Smaller funding rounds, with their inherently lower risks, have become more attractive. Despite some notable deals in recent years, this trend toward early-stage investments is expected to persist into 2024 unlike Series A or Series B.

Regarding the unicorn phenomenon, Katsumata expressed skepticism about using the number of unicorns as a metric for ecosystem health. He cautioned that unicorns are often outliers and may not accurately represent the overall vitality of the startup landscape.

Additionally, the panel observed a rise in domestic funding, with an increasing number of local investors directing capital towards Indian startups. This growing domestic investor base is infusing more money into the ecosystem, further supporting its growth and resilience.

In summary, the venture capital landscape in 2024 as the VCs say will be characterised by a strong emphasis on unit economics, profitability, and sustainable growth, with a continued interest in early-stage funding and an increase in domestic investments.