According to Tracxn data, 2023 has been one of the worst years for funding for India’s startup ecosystem in the last five years, with investments down 72% to just $7 billion from $25 billion in the previous year between January and November of this year. Compared to 23 unicorns in 2022, there were only two this year.

This decline was caused by a number of macroeconomic factors, as well as problems with corporate governance, inflated expectations from the founders, and maturity in the investment community.

Although there is still optimism for the new year, venture capital and private equity investors are predicted to shift their investment strategies from FOMO-driven selections to concentrating on businesses that demonstrate a scalable, sustainable business model.

“We are transitioning from one cycle to another. The last cycle in technology was more financial as funding dried up which had a damping impact on valuations. It started from the IPO and pre-IPO market, and then trickled down to early stage markets as well. But the bottoming process is finished now,” said Vikram Chachra, founding partner at 8i Ventures.

He went on to say that investors who were previously willing to overpay are now, to a certain extent, underpaying. However, in the next two quarters, the industry is heading toward a balance between investors and founders.

Investors think that regardless of how sound their business models were or whether they were making any money, founders started to demand extremely high valuations because of the market climate and an unexpected infusion of capital in 2020–2022. Fearing that they would miss out on a good company or lag behind their peers, venture capitalists were playing along. However, as interest rates rose, lower valuations became the norm and swung the balance in favor of investors.

There is a lot of dry powder remaining with investors as a result of the smaller deal sizes and amounts. Although this might result in increased funding in the upcoming quarters, investors should expect to pay closer attention to profitability and sound financial metrics—aspects that were previously overlooked in favor of metrics like customer satisfaction and subscriber count in a growth-at-all-costs environment.

Furthermore, according to Mitesh Shah, cofounder of Inflection Point Ventures, the caliber of founders and mid-to-senior level leadership will also influence VCs’ willingness to sign checks and up the ante on corporate and financial diligence, even at the seed stage.

“In the previous year, we saw the deal cycle getting longer. Earlier it was 2 months, now it is 4-6 months, because investors were evaluating multiple companies at once and undergoing deep diligence. This is expected to normalise in 2024,” Shah said. VCs have also become more disciplined and there is open dialogue and feedback, turning the deal making process more mature, he added.

Nevertheless, Neha Singh, the founder of Traxcn, predicts that the industries that made waves last year will still be gaining ground in 2024. Deeptech and businesses involved in the ecosystem of electric mobility are among them.

While enterprise tech and fintech remained dominant, investors showed interest in an increasing number of spacetech companies. These industries are anticipated to continue attracting investments since India is developing into a significant consumer market and manufacturing hub, according to Singh.

“There is a good amount of positivity emerging for 2024 indicated from public market euphoria which we saw in October-December. The overall environment is buoyant. In November and December only, a number of middle and late stage deals started materialising and more are expected as VCs return from the holidays,” according to Shah.