No one could have predicted how 2022 would go. Although the respite from the pandemic at the beginning of the year meant there was a whole lot of optimism, last year was one mad rollercoaster. What will 2023 have in store for us and can we get our Indian startup and tech predictions right?
We saw massive tech stocks collapsing, funding coming to a crawl, a bloodbath in the crypto world, war, inflation, rising interest rates, 18K layoffs, startup shutdowns, regulatory drama, and so much more. Like we said, no one could have predicted that, but we did try.
On January 1, 2022, our predictions for the year included the dawn of 5G (hit), IPO boom (miss), policy hurdles for tech giants (hit), inflexion point for healthtech (miss) and better clarity for the crypto industry (we count that as a hit after the whole FTX saga). A 60% hit rate is not bad considering the year that went by.
But what 2022 told us was that sometimes predictions don’t work, but it also gave us plenty of information about what we can expect in 2023.
This year, we have kept our predictions snappy and looked to cover all the key sectors and aspects within the startup ecosystem. Here are all the developments that we believe will shape Indian startups and the tech industry in 2023.
The Digital India Market
Corporate Giants Push For Bigger Slices
- Tata Digital will look to acquire a major marketplace to accelerate Tata Neu ecommerce business after a slow first year in 2022
- Reliance Jio will make a major splash in the digital entertainment space and combine VOOT, Jio Cinemas, VOOT Select and VOOT Kids; it won’t be a surprise if it even surpasses Disney+Hotstar with this merged platform
- Jio will look to expand its focus on industrial IoT and automation to back 5G services for enterprises
A Brave New App Economy
- Alternative Android app stores will sprout as a result of CCI ruling, but Google will look for regulatory intervention for pricing parity on paid apps
- After Google, Apple will face some heat from app makers or regulators over its app pricing and payments policies, given the growth of Apple device ecosystem in the past couple of years
Consumer Spending Will Pick Up In H2 2023
- Union Budget 2023 likely to see short-term income tax relief to boost consumer spending index; spending will pick up post March 2023 fuelled by retail spending
- Backed by late-year consumer spending surge, ecommerce festive season sales will outpace 2022 in terms of online shoppers and average order value
Startups, Tech And India’s G-20 Presidency
- Startup-20 Engagement Group will open up pathways to overseas market and collaboration opportunities for Indian startups
- Public digital goods such as UPI, India Stack models will be replicated in other geographies, opening up new avenues for Indian startups
Startup Funding, IPOs, Valuations & Trends
Smaller IPOs And Late 2023 Rush
- Revised DRHPs will be seen in second half of 2023 from startups that postponed IPO plans in 2022
- Loss-making startups to wait out negative sentiments till early 2024 before revisiting IPO plans, as indicated in the Inc42 founder and investor survey in our annual tech startup funding report
- Buoyed by Tracxn and Droneacharya listings, IPOs of smaller profitable tech companies likely to hit public markets in 2023; 2023 will see more new-age tech company IPOs than 2022’s three public listings, but these will be from companies with sound fundamentals and simple business models
The Great Layoffs Effect
- As seen after The Great Resignation, layoffs at Amazon, Meta, Twitter and other tech giants in the US will boost new startup creation in India
- Early-stage funding outlook remains positive for 2023, indicating a market ripe for new startups
How Startups Will Hire
- Most startups will continue hiring for new roles throughout the year, but salary correction (after 2021 inflation) effects will linger
- Big pay raises will be out of the question for loss-making startups as evidenced in the founder survey in the Indian Tech Startup Funding Report, 2022
SaaS On The Unicorn Trail
- Soonicorns in SaaS, fintech and B2B ecommerce are best placed to get higher valuations as these sectors have seen limited impact in 2022’s funding winter
- The number of new unicorns is likely to be on par with 2022, if not higher. While it’s not clear whether last year’s valuation correction will linger deep into 2023, much will depend on whether the soonicorn club has reduced losses to a great degree in 2022
Flat And Down Rounds To Linger
- Loss-making unicorns will continue to see flat or down rounds as investor confidence remains muted when it comes to funding cash burn
- Startups in the unicorn club will be repriced similar to OYO’s devaluation by SoftBank in 2022; this will particularly impact startups that raised at high valuations in late 2020 and 2021
Shutdowns & Layoffs To Continue
- While edtech stole the headlines for layoffs in 2022, the situation is far from resolved at many startups; the lingering slowdown will lead to more shutdowns and distress sales in K-12, test prep areas
- The effects of the ‘silent layoffs’ of 2022 across large and small startups will become clearer and the true picture of the Indian startup downsizing will emerge; we have a feeling 18K layoffs is just the tip of the iceberg
- Lacklustre year for ecommerce brands will bring laggard D2C brands to the M&A table, particularly drawn by the allure of house of brands
- Pandemic-born businesses such as regional B2B supply chain startups, B2B and B2C fresh produce delivery startups likely to see consolidation through acquisitions for talent or distress sales
Funding Recovery
- Half-yearly funding will match 2019 levels for 2023, with the dry powder being deployed more freely by VCs after June
- Overall, Indian startup funding will remain close to the 2022 tally of $25 Bn, with the bulk of the funding coming in Q3 and Q4
- Mega rounds will likely remain at 2022 levels, given that investors will continue to offer sober valuations even if market sentiment turns in the second half; all this depends on unicorn makers such as Tiger Global, SoftBank and marquee funds such as Sequoia, Accel that typically lead such rounds
- Seed-stage funding will see a breakout year in 2023, fuelling a new wave of startups in SaaS, fintech and D2C/ecommerce sectors
- VC firms will find it harder to raise new funds in 2023, especially those at the end of their fund cycles, as evidenced by responses in our year-ending investor survey
Emerging Hubs Come To The Fore
- As capital inflow declined in the top three startup hubs, funding in emerging startup hubs rose 41% in 2022; this will fuel the next generation of startups solving for ‘Bharat’
- Micro VCs and small funds will look to back startups in emerging hubs in quest for value deals with big upsides
- Growth and late-stage startups will eye M&As in emerging hubs to add to revenue streams
Founders Replaced By CEOs; Corporate Governance Will Take Priority
- Focus on sustainability and profitability will force scaled-up startups to go beyond founder vision and look for operational efficiency. As growth and late stage startups face monetisation hurdles, founder-CEOS will increasingly be replaced by professional CEOs
- Startups looking to list in 2024 will rejig leadership in 2023 to allow new leaders time to bed in prior to listing; Greater emphasis on corporate governance systems will rein in founder influence on operations
How The Big Sectors Will Fare
Fintech: Consolidation, Major Push For AAs, Regulatory Hurdles & More
- Regulation bottlenecks will complicate lending tech operations and in turn boost prospects of startups in lending SaaS, risk management, underwriting and other segments
- Fintech super app push to continue with expanded insurance, broking services by the likes of Paytm, PhonePe, Navi and other startups
- Merchant lending likely to come under regulatory scrutiny due to issues such as mis-selling, inauthentic customers and other issues
- Asset management company (AMC) licences will become the next big battleground for fintech and investment tech apps
- Emergence of startups and services built around network effects of the account aggregator ecosystem
- Embedded finance will make a comeback for lending after a minor speed bump for BNPL in 2022. In particular, API-led embedded insurance products for travel likely to boom in 2023
Edtech: Layoffs, Skilling Boom & Increased Scrutiny
- Layoffs likely to continue in test prep, K-12, particularly in content operations and sales teams; automation to take centre-stage for customer service as companies look to downsize and turn profitable
- Funding likely to gravitate towards tech certifications and soft skill development as well as vertical edtech plays such as maths, science and language learning
- Edtech giants to likely see regulatory scrutiny, similar to probes into BYJU’S refunds and EMIs in 2022
- Launch of YouTube Courses will disrupt startups such as Unacademy, PhysicsWallah that rely on content creators and YouTube Channels for acquisitions
- Hybrid models will necessitate more acquisitions as the battle for coaching class turn into a real estate battle
- Acquisitions and investments in adjacent categories (such as PhysicsWallah’s iNeuron deal) as most companies look to grow vertically to maximise LTV
Ecommerce: Corporate Investments, D2C M&As, ONDC Expansion, & More
- Consolidation in beauty and fashion segments in D2C given long-tail market and fluid synergies between brands
- Consolidation within house of brands category as larger platforms bank on their economies of scale to raise big rounds and acquire smaller rivals
- Ecommerce giants Flipkart and Amazon will join ONDC as the project goes live in most cities in India
- Omnichannel experiments such as metaverse stores will continue; Flipkart’s move to be followed by others particularly as a marketing tool related to 5G
SaaS: The Funding Will Roll In
- Despite 2022 ending with layoffs in this sector, enterprise tech startups saw an uptick in overall funding in the year. In 2023, SaaS is likely to be the most funded sector in till June
- SaaS for SaaS or subscription management will come to the fore as companies look to manage software costs intelligently
- Productivity-focussed SaaS tools will leverage AI and machine learning, including developments in GAN and ChatGPT to enable business customers to achieve tasks faster and keyboardless
- Adtech and martech startups will find greater traction as companies look for better return on ad spends and marketing investments
Consumer Services: Quick Commerce’s New Avatar & Swiggy IPO?
- Social security code for gig worker will come into play in 2023, prompting operational changes from food delivery, ecommerce and consumer services startups
- As profitability becomes a priority, consumer services startups will scale back from loss-making cities as Dunzo did at the tail end of 2022; expect pull back or slow expansion even at a city level especially when the city is contribution margin positive as this will hurt unit economics
- Swiggy will likely file for IPO in the year but it will face questions around its wide business model which has added parts such as Minis, Dineout and premium grocery services in the past year
- Reliance will further invest in Dunzo to broaden focus on quick commerce built around its retail network, while Tata will look to expand BigBasket’s capability in this regard
- Quick commerce’s next avatar (in a post 10-minute delivery world) will be physical stores, as companies will look to double down on profitable dark stores with minimal storefronts
Mobility Upheaval To Continue
- Leadership vaccuum, slow recovery for Ola could force the cab hailing company’s merger with Uber despite denials in 2022, and given Bhavish Aggarwal’s major focus on EVs, it won’t be a surprise if Ola’s original promise is sold to its biggest rival
- Automobile majors and OEMs will invest heavily in mobility tech plays to build towards connected driving experience around 5G promise
2023’s Emerging Club
Watershed Year For EVs
- Electric vehicle ecosystem will see record-breaking capital infusion, particularly around battery charging and swapping infrastructure plays
- Investments in new-age OEMs such as Ather Energy, Ola Electric, Bounce, Simple Energy will surge in 2023, driven by large private equity players
- Government will push for gallium nitride (GaN) manufacturing and research towards battery manufacturing and space applications
Climate Tech’s Moment In The Sun
- Investments in climate tech and cleantech to peak in 2023 as VCs flock to early stage opportunity
- Food and life sciences startups will get early-stage boost from micro VCs and corporate-backed funds
- Investments in cleantech and energy tech by large corporate players such as Reliance, Tata, Adani on the cards
Finally, An Agritech Unicorn (Or Two)
- The agritech sector will see its first unicorn in 2023, with Patna-based DeHaat becoming the first to enter the club; Chennai-based Waycool, last valued at $700 Mn, also likely to enter unicorn club in 2023
- Investments in climate-resilience agritech solutions to see a surge in 2023 as part of broader climate tech push
Deeptech Will Go Through Huge Innovation Moment
- Applications based on generative adversarial network (GAN) frameworks will come to the fore for customer engagement, retention and scaling up content-centric operations, but monetisation will be slow
- Large language models such as ChatGPT, PaLM will be leveraged for applications in healthcare and telemedicine services, content creation, customer support and more
- Machine vision will see a major spurt in India thanks to the push for electronics and systems design, and semiconductor manufacturing
Stronger Web3, Crypto Regulations Incoming
- Following the announcement of crypto taxation last year, we expect the Union Budget 2023 to address some issues related to the status of cryptos as an asset class
- India’s G-20 presidency likely to bring major economies on the same page for global crypto regulations
- High-profile FTX and Terra-Luna busts will force regulations for crypto investor protection
- Increasing 5G penetration, mixed reality hardware launches to drive first wave of adoption of metaverse platforms in Indian metros
- Clarity on crypto-based compensation and incentives for employees at Web3 startups given high taxation