2022, a year of intermittent fasting for startups and VCs

January 17, 2023
Fintech
Press

Synopsis

The year 2022 has been a rollercoaster for tech startups across various fronts. From a high of $40 billion plus investments in 2021 to a winter that continues into the new year. This year also witnessed the high of a listing, a new phenomenon for tech startups, which remained short-lived for most of them — with prices spiralling down below the IPO issue price as they experience the wrath of an unforgiving public market that measures performances by quarters.

While global macroeconomic headwinds have largely been the key driving factors for the tailspin in funding, the positive takeaway has been the resilience in the Indian economy, the strong public markets, and a continued interest in new age economy businesses as witnessed by the successful IPO of Droneacharya Aerial Innovations last week. There has also been a continued high number of M&A deals signalling consolidation, 23 Indian startups achieving Unicorn status, and the increase in the available dry powder with the launch of dedicated India funds by big VCs.

Looking ahead, the themes of consolidation and "Bharat" (penetration into smaller cities and towns) are expected to dominate. As tech-bankers, here are a few themes we are upbeat on.

Health Tech: 2022 marked a year of acquisitions in the hospitals, equipment & specialty clinics sectors. 2023 is likely to see areas like mental health, sexual wellness, fitness & wearables, fertility, and chronic disease management taking off. Startups that have a potential to tap into specialty areas, develop adjacencies quickly, create innovative distribution channels, adopt aggressive low-cost customer acquisition strategies, and build standard in-app abilities to cater to users across their journey, will lead.

Consumer: Private consumption in India is expected to reach $4.5 trillion by 2030 and India has over 800 D2C brands. Established players such as ITC, Marico, and HUL have turned to inorganic growth strategies in the space. Consumers are looking for sustainable products as seen across lifestyle (apparel, footwear, beauty and personal care, accessories segments) & home decor segments. There is a huge opportunity for product innovation, growth into smaller cities & towns, and creation of unique distribution channels.

Enterprise Tech & Services: Consolidation has been a leading trend in the Enterprise Tech & Services sector through acquisitions by IT majors. A similar trend is expected to continue in 2023 from the likes of Accenture, TCS, and Wipro. It is promising to see companies across DevOps and MLOps come up in non-VC hubs like Indore, Ahmedabad and Jaipur. With a cautious approach to 2023, low-cost customer acquisition strategies, consumer stickiness, and lean organisations will be crucial. Specialised SaaS companies will generate continued interest.

Logistics & Transportation: This sector has seen electrification as a top theme with OEMs, battery-tech, battery swapping & charging stations attracting the money. Another key theme we see playing out, though a bit nascent in India, will be the circular economy of lithium batteries – refurbishment and recycling of batteries in an environmentally sound manner. Companies that have raised large rounds will focus on sustainable growth models.

Fintech: 2022 will be remembered as the year of absolute discipline for the fintech sector with regulations, readjusted business models and a 40% funding drop. But all is not gloomy for the $29 bn fintech sector that attracts 14% of the global funding share. Embedded Finance, BNPL-B2B, Climate financing and Insurance distribution look interesting from a funding perspective. Fintech companies need to stay focused on margins while cautiously building scale over the next 2 quarters.

Having seen several funding cycles, we believe this is a volatile business and we should learn to live with it. Just like we have been taken off-guard by this correction, we will be surprised by the rise. Tech is clearly making a difference in the lives of consumers and is here to stay. With a pragmatic approach to private markets, 2022 & H1 '23 will prove to be a period of intermittent fasting for both startups and VCs.

(The writer is the Managing Director at Merisis Advisors, a boutique Investment Banking firm).

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