In the face of a potential global recession in 2023 as per a World Bank study, companies across sectors including Enterprise Tech & Services have been bracing for growth cautiously. Spending by enterprises, IT and IT services companies has been chopped over the last few quarters. Expansion plans have decelerated and a careful approach has crept in. The resilient companies on the other hand have made the best use of this situation and resorted to consolidation as a means of expansion into newer markets and acquisition of talent. With a negative business sentiment carrying forward from the last financial year, the year 2022 saw early signs of consolidation with a spate of acquisitions by IT behemoths such as Accenture, Infosys and Wipro. We expect this trend to continue into FY 2023-24.
The past year was largely marked by a host of economic challenges, chief among them being the rising inflation triggered by the monetary policies implemented to counter the effects of the Covid-19 pandemic, as well as the ongoing conflict in Ukraine. This inflationary trend has had a disparate impact on different sectors of the tech industry, with consumer-facing and those dependent on consumer space i.e. ad/marketing-focused tech companies such as Google, Facebook, Twitter, etc dealing with a decline in usage and revenue growth. However, a large part of the community streamlined their business opportunities by spotting emerging themes, reevaluated their revenue models, operations and talent pool thus making way for a resilient 2023.
A Venture Intelligence report stated SaaS and Enterprise Tech startups raised $4.9bn in the first eleven months of 2022, a 15% jump to the amount raised in the whole of 2021. No wonder, the sector has attracted attention for its resilience and will be a much watched out space in 2023. Our team looked up for sub-sectors within this space and identified 6 key trends that may gain momentum.
1. Vertical SaaS: One silver lining in this otherwise cloudy 2023 forecast is that investors still maintain a preference for SaaS companies and significant capital will continue to be deployed towards profitable SaaS companies as well as those with great SaaS metrics. Vertical Specific SaaS companies, especially in underpenetrated areas such as construction, manufacturing, agriculture & more are ones to look out for.
2. BNPL B2B: Fintech firms, especially payment companies operating on thin margins, have come to understand that lending is the key in the highly competitive fintech ecosystem, and have accordingly incorporated lending and other financial services into their core offerings. This led to the rise to a new breed of companies building infrastructure along the SaaS model to enable firms to lend and provide other financial services. While the high-interest rate environment may initially temper the growth of these companies, they are likely to endure better in the long run. Companies that are aiming to be capital efficient on account of the current funding winter are likely to tap into alternative routes to extend their cash runway i.e. using the likes of entities like Billie, Mondue, Tranch, and SaaSPay, which offer buy-now-pay-later options for B2B companies.
3. Audio & Video Software: In India, the Covid-19 pandemic and high levels of smartphone and internet penetration have led to a surge in the consumption of video and audio content. This trend is likely to boost the popularity of video and audio editing software, as influencer-led marketing becomes increasingly prevalent as a means of driving sales.
4. Cybersecurity: With uncertainty in the economic and geopolitical climate coupled with an important election that is to happen at the end of this year, the focus will be on cybersecurity companies. Enterprises, for their part, are not skimping on cybersecurity, as new vulnerabilities continue to be discovered constantly and unfortunately after they have already been exploited. These underlying issues are unlikely to go away and we also haven’t seen any major all-encompassing solution or tech emerge in this space for us to pin our hopes on. It is time that something should emerge to plug in new & undiscovered vulnerabilities with advanced AI models.
5. DevOps & MLOps: The emergence of DevOps, MLOps, and other emerging technology startups in non-VC hubs like Indore, Ahmedabad, Jaipur, etc suggests the expansion of the startup ecosystem beyond traditional tech centers like Bangalore and Hyderabad. Although SaaS multiples have largely fallen, the above areas, especially DevOps, still command the SaaS multiples comparable to the VC rush of ‘20 and ‘21.
6. Generative AI: Open AI's ChatGPT has caused a stir since its launch and is expected to inspire a wave of startups looking to build innovative products using this technology. While it is still in its infancy and mainstream adoption may take some time to materialize, there are already a number of funded startups that have achieved unicorn status on the back of ChatGPT's predecessor, GPT-3, most notably Jasper AI, a generative AI tool used to create written and visual content.
A key miss of 2022 was the much-hyped Web 3.0 revolution. The NFT craze has largely fizzled, with NFTs featuring everything from celebrities to monkeys finding few takers. Safety concerns, such as the breach at Axie Infinity, the general cooling of the cryptocurrency rates, and various high-profile companies struggling, have not helped the cause of the Web 3.0 community. The core underlying philosophy of blockchain technology was decentralization that still looks like a pipe dream. It would be interesting to see how the Web 3.0 community regroups and how this much talked about technology is going to play out in the year that lies ahead.
As the startup ecosystem looks for clues in 2023, it is important for enterprise-focused companies to carry the many valuable lessons that have been learned if they want to lead from the front. Most startups have already cut costs and are better prepared for a long winter & potential future setbacks. The temporary reduction in funding has caused valuations to correct in many areas while in some areas like MLOps & DevOps, the peak valuations of 2021 will continue for longer. However, companies with strong technology platforms, scalable business models, and sound financials will continue to attract venture capital investment.
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