Mumbai: India’s startup economy has been booming. The last decade has seen significant activity on multiple fronts including the founding of new startups, amount of funding and number of investment rounds, influx of global investors and startups, development of regulatory infrastructure, global mergers and acquisitions, and internationalisation.

Inflexor Ventures, a sector-agnostic VC firm that invests in deep & emerging technology startups from Seed to Series B stages. Recently, the company participated and invested in Atomberg Technologies Series C funding round in spite of funding winters in India.The fund also saw an exit from Securtime (Enterprise Solution) portfolio startup from Fund 1 (Parampara Capital) and a first exit from Fund II (Inflexor Ventures) from Steradian Semiconductor (Deeptech & CyberSecurity). 

While deep-tech is a generic term and encompasses multiple technological domains, the company defines deep-tech as any technology IP which is unique and defensible with a high barrier of entry and which can create an outsized impact on its industry (thereby impacting the world at large, indirectly). Over the last few years, the company has invested across technologies ranging from cyber security, artificial intelligence, augmented reality, and space tech.

Indiantelevision.com caught up with Inflexor Ventures' principal, Murli Krishna Gunturu, to explore the current state of start ups… 

Edited excerpts

On the funding winter impacted the investment landscape for startups in India

Funding winter has brought to light many challenges that were deep-rooted within the startup ecosystem in India. During the highs of 2021 and early 2022, we witnessed an unprecedented flow of capital into startups in India. In hindsight, many of these firms did not have strong fundamentals backing them and were raising capital at valuations that were disconnected from the real-world value of the underlying business. Come 2023, and the funding winter, these firms are now finding it difficult to raise capital at even flat valuations. This has resulted in widespread cost-cutting measures across the industry in the form of lay-offs, reduction in non-core expenditure, etc. In our view, the industry will take time to bounce back to the pre-2021 levels, as investors are being cautious about the businesses they decide to invest in.

On the major factors contributing to the decline in funding deals and raised amounts for Indian startups

To understand the factors contributing to the decline, we must first address the reasons for the boom that we witnessed in the previous few years. In the wake of uncertainty created by the COVID 19 pandemic, central banks and governments across the world began adopting aggressive monetary and fiscal policies, resulting in access to capital becoming cheaper. The near-zero interest rate policy and quantitative easing, especially in the US and the western markets flooded the capital markets with excess money, which got reflected in both public and private equity markets, including in India. Come 2022, the central banks across the world were forced to pull back on some of these policies in an effort to curb the inflationary pressures in the market. This resulted in a shortage of liquidity and precipitated a fall in the public markets, leading large foreign institutional investors to pull back from emerging markets like India. Pullback from these large investors from the West caused trepidation among the Indian domestic investors, further compounding the funding winter. Another factor that played a role was the cool down in the IPO market, and the relative underperformance of the IPOs of the post-pandemic years. This raised a question of exit possibilities for private market investors resulting in a decline in the overall funding scenario.

On startups adapting to the funding challenges and strategies

Start-ups of all sizes are taking a long hard look at their priorities. Many non-core activities have been suspended, and in some unfortunate circumstances, lay-offs have been announced to reduce costs, and to extend the runway. Start-ups are also being prudent with their non-personnel related spending, such as cloud costs, other software costs, cash-backs etc, in hopes of reducing burn and keeping the lights on. While it is too early to say whether any particular strategy is better than the other, reduced expenditure and increased focus on profits is a welcome change in this new era.

What sectors or industries are more resilient to the funding winter and experiencing sustained investor interest businesses with strong fundamentals, irrespective of the sector continues to attract capital even amidst the funding slowdown. Sectors where a lot of capital goes into customer acquisition are the first to feel the pinch, because investors are asking hard questions about metrics around customer acquisition, retention etc. These include consumer-focused businesses across sectors. We are seeing a noticeable shift in appetite away from pure consumer businesses, to more B2B focused start-ups and strong innovation/IP-driven business models.

On the funding landscape evolving for Indian startups in the near future

In the near future, we expect the ecosystem to remain slow on funding, and things to get worse, before it gets better. A winter of this magnitude was necessary to correct some of the excesses of the past few years. We expect start-ups to continue to tighten their belts with regards to human capital expenditure and discretionary spending, and this will have cascading effects on the downstream consumption-linked markets. However, our long-term view of the Indian start-up ecosystem is certainly bright. Slowly, but surely, we are moving upwards as a nation from a consumption capacity point of view, and combined with our entrepreneurial DNA, India will surely remain one of the hottest markets for startups in the long term.

On advice to startups, navigating the funding winter and seeking investment opportunities

Prudence is advised across the board, both in the top line and the bottom line. Focus on the primary objective i.e. markets and customers of the business, and double down on retaining and growing the lifetime value of the customers. There will always be demand for investing in businesses that provide real value to their customers. After all, the greatest companies are created in the toughest of times.