Dec 24, 2023
Daringly Predicting 2024
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Technology
Does it feel like a year has passed?
The 2020s decade has been crazy since it began. A pandemic was followed by a war and another war this year. As interest rates rose this year, assets got pulverised everywhere.
Crypto saw its two big stars fall as swiftly as they rose. Indian equity markets rallied like there was no tomorrow. Confusing behaviour. Then there was that confusing World Cup we want to forget. This is just the first year where we have officially been pandemic free.
With travel and normalcy coming back, it feels like more than a year passed since we did our last predictions.
Like a judge giving a verdict on a personal case, here we are scoring ourselves
India SaaS will be among the top 2 funded sectors, with the lowest mortality rates: After finishing second* after Fintech despite seeing only about $1.56Bn in funding in 2023 (down by 78% compared to 2022), India SaaS remains an investor favourite. SaaS will be the all weather sector, which sees consistent growth. It is the “risk-free” sector in the risky business of investing. [While retail appears to be second it includes B2B commerce and D2C brands, which are separate categories] (9/10)
Five or more unicorns will be repriced: 7 unicorns faced public valuation markdowns this year, including BYJU’s, Swiggy, PharmEasy, PineLabs, OLA, Eruditus, and GupShup. Many others have privately been repriced. As capital has become expensive, investors have doubled down on reevaluating their portfolios and many from the list have seen massive (50-75%) devaluations. Gupshup has also lost its unicorn status. It has been a tough year (10/10)
Funding will be higher than 2019 but lower than 2022, with less than five tech IPOs: 2023 was a crash for the Indian ecosystem of unheard proportions. Funding fell ~75%, a collapse not seen in the country’s history. 2023 was lower than the now highs of 2022. But it collapsed so badly, it could barely cross 2016. We went back about 7 years, not 5 that we had expected. 3 startups went public, Mamearth, Zaggle and ideaForge. 2 of these were tech IPOs. We predicted 2 of 3 in this prediction. (6/10)
Climate tech will emerge as a strong theme with $100M+ VC funding: Excluding electric vehicles, which we didn’t include in our definition of climate tech, the category received $200M of funding across multiple new themes. Marketplaces, energy efficiency solutions, storage and testing saw multiple startups being started. The overall environment tech category pulled in $1B+, a strong performance in an otherwise weak year. (10/10)
Fintech will mature, remaining the highest VC funded sector in 2023: Fintech did remain the highest funded sector this year despite capital ingestion dropping to about a third of the 2022 levels. It pulled in $2B+, being the most funded sector yet again. The beginning of the year for the sector was slow, but it caught pace in the 2nd half with big first rounds (10/10)
Two or more D2C roll ups will consolidate in the sector’s moment of reckoning: 2023 was the year of reckoning for the sector, with the original creator of D2C roll ups Thrasio filing for bankruptcy. While we expected the sector to struggle this year, we did not expect it to be so swift with the pioneer. Mensa acquired Times Internet’s house of brands ILN, reorganizing post that. This was perhaps our most prescient prediction (10/10)
In a year that was incredibly hard to predict, we scored a 9.5/10. It is now time to predict 2024.
#1 At least 3 new VC funds will start with $10M+ fund size, while larger funds will downscale
2023 was the worst year in startup investing since 2016.
It is least expected that new funds will start as there seems to be little activity. The speed of investing slowing is unlikely to pick up in 2024. But this is an excellent time to be investing.
Founders, teams and investors who are serious will remain in the market. As round sizes and valuations rationalize, the market will become attractive for new players with new strategies to enter.
This is likely to catalyse the creation of new small funds with new managers entering the mix. Most or all of these will likely be part of the startup ecosystem.
At the same time, as the number of opportunities to deploy in startups reduces, funds raised in the peak of 2021/22 are likely to downscale. Some of these funds will likely see team members leave while also reducing the size of deployments.
Reduction in competition will also make it attractive for newer players to come into the mix. India will likely behave like the early 2000s in the US, post the dot com collapse. It began one of the longest bull runs in startup history, with startups and funds starting then benefiting the most.
2024 will be the birth and consolidation of funds in India.
#2 OpenSource AI startups will breakout from India, helping AI raise $300M+ and making it the fastest growing VC segment
2024 is predicted to be the Year of AI, and we agree.
For long, AI was a buzzword decorating startup pitch decks or treated as a side-project in enterprises with 5-6 folks working on it. However, ChatGPT’s success and the plethora of innovations since its launch in late 2022 depict that the hype is real now.
Many in the ecosystem feel the ecosystem is hyped, but India could have a big play next year onwards. We expect many IT services companies to invest deeper in AI capabilities.
Globally, AI startups have defied the funding winter and raised a record $10b in 2023. Funding will continue to grow 85-100% CAGR in 2024 with ‘Fast & Furious’ filing of patents and aggressive hiring of GenAI talent across sectors.
AI’s use across industries, workflows, and functions will transform existing ways of work fundamentally. This will vastly improve productivity, reduce the time to launch new products, and reduce costs of R&D and innovation.
In India, the GenAI market was valued at $1.1b in 2023 and is expected to grow at a CAGR of 48% to $17b by 2030
Q3/Q4 of 2023 has already started seeing AI startups from India emerging from stealth and raising big rounds. We have seen Sarvam AI raising a big $41m Series A round to build Gen AI solutions for India’s many languages. Ola founder’s third startup- Krutrim SI Design raising a $24m debt round. There is also Bharat GPT by Corover.ai, Pragna by Soket Labs, Tech Mahindra-backed Project Indus to promote ample competition in the space.
We are also seeing VC funds being launched to back Indian AI startups.
We are already seeing companies like Sarvam AI work with Indian enterprises to co-build domain-specific AI models on their data. Open-source LLM stacks will promote collaboration in India, allowing enterprises across sectors such as healthcare, autonomous vehicles, manufacturing, and financial services to embed AI into their offerings.
It will be time to Build for AI Startups in India in 2024.
#3 Bharat startups will breakout to scale, with at least one being valued >$500M
Bharat startups were a ray of hope in a dramatically slow year for the entire ecosystem.
PocketFM was in the process of closing a $80M round, bootstrapped Astrotalk closed in 300 Cr, while KukuFM and SriMandir had good years. While Sharechat has struggled to grow into its valuation, the newer breed has figured new ways to make money.
Startups like Pocket have expanded globally, while AstroTalk and SriMandir have gone deeper into the Indian market. As the Indian economy has scaled, the Indian consumer market has also deepened to become one of the largest in the world.
As more Indian users new to the internet learn to navigate it, consumer apps focused on this base will tap into newer revenue pools. With this group realising the value of paying for services, the Bharat story will start to pick up.
Expect this to help get at least one company beyond the $500M valuation in 2024
#4 5+ Consumer Brands will cross $100m in annual revenue with positive CM3
When the tide turns, the most resilient and capital-efficient sectors shine through. We saw this in 2023 with the SaaS/ Enterprise tech segment and consumer brands.
The consumer brand opportunity stays strong in India. D2C market is expected to cross $100b by 2025. Fashion and clothing is expected to grow to $43b by 2025 with the highest potential.
In H1CY23, consumer brands saw 3x funding with companies raising $981m vs. $333m in H2CY22. Of these though, Lenskart and FreshToHome accounted for lion’s share with 72% of funding received. We also saw the first D2C brand to IPO- Mamaearth receiving a positive reception.
Liquidity for building patiently was rewarded phenomenally when Titan acquired the remaining shares in Caratlane, giving a bumper exit to its founder Mithun Sacheti. The exit will encourage other consumer brands to learn from CaratLane's playbook to focus on fundamentals, build sustainably and accelerate the pedal as you become CM2/ CM3 +ve
Given the flavour of the season, most consumer brands have also focused on turning profitable and grow sustainably than engage in a CAC war to capture market share. Post COVID, some have also started setting up offline stores to build an omni-channel play, strengthen brand recall, and increase market visibility.
Further the first wave of consumer brands which have grown profitably like Lenskart, Boat, Mamaearth, and Noise have helped the next ones learn from their 10-100 journey. The established playbook on GTM, which channel to target for which segment, branding and marketing and building a cost-efficient distribution has helped the emerging ones learn from the virtuous cycle.
As the market matures, consumer brand investors are also learning from the first cycle of startups that grew big and guiding the next ones under their wing on the potential challenges and fail points in advance to be able to counter it.
All these learnings will compound to improve the overall profitability index for consumer brands in 2024. Q3/Q4 has seen funding uptick in consumer brands with companies like Pilgrim, Nathabit, Atomberg raising VC funding and we expect it to stay strong in 2024.
We expect a lot of consumer brands in the $50-99m ARR range to be able to cross the $100m ARR benchmark, and that too with positive CM3. We will be keenly watching companies like CountryDelight, Licious, Sugar Cosmetics, CureFoods, iDFresh, Atomberg, Melorra, Wakefit, and Wooden Street, among others, to hit these milestones in 2024
Consumer brand critics have long scoffed at the size of India's opportunity and its concentration at the top. Consumer brands in 2024 will show who has the last laugh as they amaze and delight the market.
#5 >50% of tech unicorns that IPO will be profitable
The unraveling of Tech IPO’s listed in 2021/22 in India and their carnage in the public markets made IPO eager tech startups go in deep freeze on their listing plans.
PharmEasy, Mobikwik, Boat deferred their listing plans, Ecom Express stalled it due to market volatility. Still others who were awaiting SEBI approval like Oyo, Snapdeal, Droom, Yatra are re evaluating their listing plans.
While there have been glimmers of success like Tracxn or Droneacharya’s performance post listing, most biggies saw an initial sizzle and eventual fizzle. In the gold rush, investors valued the companies based on the market opportunity or digital GDP growth rather than on their business model or unit economics. Most companies also got listed at expensive valuation with public investors seeing no further upside, leading to some stocks cratering.
As the bubble burst these publicly listed tech companies sharpened their focus on moving to profitability and growing sustainably. Their eventual resilience and recovery started getting rewarded by retail investors. Sample this that, Zomato is up +112% YTD, Paytm at +20% (after a 30% fall last month), Policybazaar at +70%.
Tech pessimists 0, startup optimists 1
This painful lesson has been a blessing in disguise for the next breed of tech startups waiting for IPO. It was as if the older siblings had gone through fire, faced the ultimate test to crawl, and now, walk eventually. This has helped their younger siblings, waiting on the sidelines, to focus on what matters the most to public investors before listing.
India Public Tech
The startups waiting to list have attempted to put their house in order in 2023, vastly improving unit economics and moving to profitability. They have listened to what public investors want and how they will value their stocks.
Tech IPOs that were listed in 2023 have had a relatively smoother reception. Mamaearth is up +25% since listing. Firstcry which plans to list soon is expected to have a profitable FY23.
The next set of tech IPOs will position profitability, free cashflows or margin improvements much more prominently than how aggressively they are or can grow their toplines which is a ‘coming of age’ moment for these companies. We expect 50%+ tech unicorns that IPO in 2024 to be profitable.
#6 Semiconductor startups will raise >$50M to scale
60 companies focusing on semiconductors have been founded in the last 3 years. But just 1 raised 2 million in the same time frame.
We expect the next year to be different as many of these companies will start seeing early signs of uptick in product and customers. Many of them will get enabled by the deepening focus of India on its semiconductor industry.
Will India's 60 Year Semiconductor Struggle Finally Yield Chips?
India got over $50B of semiconductor commitments in the last few years. The government has become a huge enabler of the semiconductor industry with PLIs and more support. Western economies increasingly consider India for setting up as China becomes more unpredictable.
Dixon Tech is leading India’s semiconductor push, with expectations of revenue reaching $10Bn+. The DLI scheme that is expected to help 20+ domestic companies will help create an ecosystem.
India’s renewed hardware and manufacturing focus will give these companies a new boost, helping India regain a position of strength in the semiconductor market.
As the ecosystem deepens next year, younger firms will see revenue and customers come their way. This will lead to attractiveness as an investment opportunity, which they have not been for a long time.
Writing: Bhoomika, Keshav and Aviral Design: Saumya