
Introduction
2023 marked a significant chapter in India's venture capital (VC) landscape, with a dramatic shift in dynamics driven by global and domestic challenges. India's once vibrant and rapidly growing venture capital ecosystem faced a considerable slowdown. Despite this deceleration, India remained the second-largest destination for venture capital and growth finance in the Asia-Pacific region, second only to China. This resilience in the face of adversity underscores the optimism for India’s long-term economic prospects. This report explores the major trends, shifts in investor behaviour, and the overall state of the venture capital ecosystem in 2023 while also providing insights into what lies ahead for 2024.

State of Venture Capital in 2023: A Year of Moderation
Venture Capital Financing Declines
The most striking feature of 2023 was the significant drop in venture capital financing. Total VC investments in India plummeted by approximately 65%, from $25.7 billion in 2022 to $9.6 billion in 2023. This sharp decline mirrored global trends as investors grew more cautious due to persistent inflation, rising interest rates, and geopolitical uncertainties. The economic slowdown in major markets like the US and Europe further exacerbated these concerns, leading to a tighter flow of capital into high-risk investments like venture capital.
Global Economic Pressures
Several global economic factors contributed to the contraction in VC funding. The aggressive monetary policies adopted by central banks worldwide, especially the US Federal Reserve, led to a high-interest rate environment, making capital more expensive and complex. This, in turn, increased the cost of doing business for startups, particularly those in capital-intensive sectors like technology and consumer goods. Additionally, the ongoing geopolitical tensions, particularly the conflict in Ukraine, contributed to global economic instability, further dampening investor confidence.
Domestic Economic Challenges
While somewhat insulated from global shocks due to its large domestic market, India was not immune to these external pressures. The domestic economy faced challenges such as high inflation, which eroded consumer spending power and increased the cost of borrowing. As a result, sectors that heavily rely on consumer spending, such as consumer technology and finance, saw a significant drop in investment. The broader economic environment led to both deal volume and size contraction. The number of deals fell by 45%, from 1,611 in 2022 to 880 in 2023, while the average deal size decreased from $16 million to $11 million. This decline in the quantity and quality of deals reflected the growing caution among investors.

Reduced Mega-Rounds and Unicorn Creation
A notable trend in 2023 was the reduction in mega-rounds (deals over $100 million) and the slowdown in creating new unicorns. Wary of the uncertain economic environment, investors preferred to focus on smaller, less risky deals rather than committing large sums to single ventures. This caution also reflected a broader shift in investor priorities, emphasizing profitability and sustainability rather than growth at all costs.
Shifts in Investor Paradigms
Sectoral Shifts in Investment
2023 witnessed significant shifts in investor behavior, particularly regarding the sectors that attracted investment. Historically, India's venture capital landscape has been dominated by tech-first sectors such as fintech, consumer technology, software, and software-as-a-service (SaaS). However, in 2023, there was a noticeable pivot away from these sectors towards more traditional industries that demonstrated greater resilience in economic challenges.

Rise of Healthcare and BFSI Sectors
The healthcare sector emerged as a major beneficiary of this shift, attracting significant investment due to ongoing formalization and technological advancements. The COVID-19 pandemic had already highlighted the importance of healthcare infrastructure, and 2023 saw continued interest in this sector. Investments flowed into areas such as health tech, telemedicine, and pharmaceuticals, with investors recognizing the long-term growth potential of these industries. Similarly, the banking, financial services, and insurance (BFSI) sector saw increased investment. The sector’s relative stability and the ongoing digital transformation of financial services made it an attractive option for venture capitalists looking for safer bets. The continued expansion of digital payment systems, fintech innovations, and insurance technology (insurtech) contributed to the sector's appeal.
Emergence of New Investment Themes: Generative AI and Electric Mobility
2023 also saw the emergence of new investment themes, with generative artificial intelligence (AI) and electric mobility becoming focal points for venture capital. Generative AI, in particular, witnessed a dramatic rise in investment, growing from a modest base in 2022 to nearly $250 million in 2023. This surge was driven by the potential of AI-native consumer applications explicitly tailored for the Indian market, especially in sectors like e-commerce, education technology (edtech), and media and entertainment. Electric mobility also attracted significant interest as India transitioned towards sustainable transportation. The government's push for electric vehicles (EVs) through initiatives like the National Electric Mobility Mission Plan and the Production-Linked Incentive (PLI) scheme further boosted investor confidence. The percentage of VC capital allocated to electric transportation doubled, rising from 3% in 2022 to 7% in 2023.

Investor Preferences: Focus on Profitability and Cash Flow
In addition to sectoral shifts, 2023 saw a broader change in investor priorities. There was a marked preference for startups with a clear path to profitability and positive cash flow rather than those solely focused on rapid growth. This shift was particularly evident in the decline of consumer tech and fintech financing, which previously dominated VC investments in India. For example, the direct-to-consumer (D2C) offline/online subsector saw deal volumes increase by around 80%, reflecting investor confidence in India's long-term consumption growth narrative. In contrast, consumer tech and fintech experienced a sharp decline as investors prioritized stability over potential high returns.
The Investor Landscape: Democratization and Shifts in Fundraising
Democratization of Investment Activity
2023 marked a significant transformation in the Indian venture capital investor landscape, characterized by democratizing investment activity. Growth and private equity (PE) firms, traditionally less active in early-stage venture capital, increased their presence by doubling their deployment share. This shift was driven by the top venture capital firms' move towards smaller, lower-priced rounds, while PE and growth equity firms selectively participated in more significant growth-stage deals. This convergence blurred the lines between growth equity and traditional venture capital, with both categories of investors competing for the same opportunities.
Changes in Fundraising Dynamics
The fundraising environment in 2023 was also markedly different from previous years. The total amount raised fell short of the $8 billion raised in 2022, with only $4 billion raised in 2023. This decline reflected the broader caution among investors and the tightening of global capital flows. However, it also highlighted the growing importance of domestic venture capital in the Indian ecosystem. Domestic funds now lead over 90% of fundraising activity, a significant increase from previous years. This shift underscores the increasing recognition of the importance of local capital in sustaining the Indian startup ecosystem, particularly in times of global economic uncertainty.

Emergence of New Funds Focused on Emerging Industries
Despite the overall decline in fundraising, there was notable interest in emerging industries such as gaming, agritech, and sustainability. Several new funds were launched in 2023, focusing specifically on these areas, reflecting a broader recognition of their long-term growth potential. For instance, agritech, which leverages India's vast agricultural sector and growing focus on sustainability, saw increased interest from domestic and international investors. Similarly, the gaming industry, driven by India's young population and rising smartphone penetration, emerged as a new area of focus for venture capital.

The Exit Landscape: A Surge in Activity Amidst a Challenging Environment
Increased Exit Activity
Despite the challenging environment, the exit landscape in 2023 was remarkably active. The total value of exits increased by about 70% to $6.6 billion, driven by strategic sales, non-IPO public market sales, and secondary sales. This surge in exit activity was particularly notable in the consumer technology sector, where large-scale businesses like Flipkart and Lenskart attracted significant attention from strategic buyers.

Role of Crossover Funds
Crossover funds, which typically invest in public and private markets, were crucial in driving exit activity in 2023. These funds reduced their stakes in publicly traded portfolio companies like Paytm and Zomato, lowering their exposure to Indian startups. This reduction in exposure was driven by a broader strategy of risk management and liquidity generation, as crossover funds prioritized providing liquidity to their limited partners over making new investments in the uncertain economic environment. Crossover funds accounted for nearly 65% of the total exit value 2023, highlighting their significant influence on the exit landscape.
Growth of Secondary Exits
Another notable trend was the increase in secondary exits, where existing investors sell their stakes to new investors. This trend reflects the growing maturity of the Indian startup ecosystem, with more liquidity options becoming available beyond traditional IPOs. Secondary exits were particularly prominent in the consumer technology sector, where companies like Flipkart and Lenskart saw significant interest from new investors. This increase in secondary exits indicates a more liquid and dynamic ecosystem where investors have more options to exit their investments and realize returns.

Key Shifts in the Startup Ecosystem and the 2024 Outlook
Focus on Profitability and Cash Conservation
The challenges of 2023 led to significant shifts in the Indian startup ecosystem, with a renewed focus on profitability and cash conservation. Many startups, particularly in sectors like consumer tech and fintech, were forced to reevaluate their business models and prioritize operational efficiencies over rapid growth. This shift was driven by the tightening of capital flows and the increased cost of borrowing, which made it imperative for startups to conserve cash and focus on sustainable growth.
Diversification of Revenue Streams
Startups in 2023 also increasingly focused on diversifying their revenue streams to reduce reliance on single sources of income. This trend was particularly evident in sectors like edtech and health tech, where companies sought to tap into multiple revenue streams, including subscriptions, advertising, and partnerships. This diversification was driven by the need to build more resilient business models to withstand economic shocks and changing market conditions.
Emergence of New Investment Themes
While traditional sectors like financial and consumer tech faced difficulties in 2023, new investment themes such as agritech, electric transportation, and generative AI gained traction. These sectors are aligned with India's long-term growth potential and are expected to continue attracting investment in 2024. Agritech, in particular, has the potential to revolutionize India's vast agricultural sector with innovations in precision farming, supply chain optimization, and digital platforms for farmers. Similarly, electric transportation plays a crucial role in India's transition to a more sustainable economy, with the government’s push for EVs expected to drive significant investment in this sector.
Government Policies and Support
Government policies will play a crucial role in shaping the startup ecosystem in 2024. Initiatives like the National Electric Mobility Mission Plan and the PLI scheme are expected to drive investment in electric mobility and manufacturing sectors. Additionally, the government's focus on improving the ease of business, reducing regulatory hurdles, and providing startup incentives will further support the ecosystem's growth.
Forward
A Cautious Optimism for 2024
Despite the challenges of 2023, the outlook for 2024 is cautiously optimistic. The Indian startup ecosystem has demonstrated remarkable resilience in the face of adversity, and new investment themes are emerging that align with the country’s long-term growth potential. While caution remains the order of the day, particularly in sectors hit hardest by the economic slowdown, there is also a growing sense of opportunity as investors and entrepreneurs adapt to the new normal. As the Indian venture capital landscape evolves, stakeholders must remain agile and responsive to the changing environment. The lessons learned in 2023 will undoubtedly shape the strategies and priorities of investors and startups in the coming year. With a renewed focus on profitability, sustainability, and innovation, the Indian startup ecosystem is poised for a new growth phase in 2024.
IP Round-up
Shein vs. Temu: Lawsuit Sparks Intellectual Property Clash:
Shein has filed a lawsuit against Temu in a Washington, D.C., federal court, accusing the rival retailer of counterfeiting, intellectual property theft, and fraud. Shein claims Temu, owned by PDD Holdings, is operating as a counterfeit enterprise by encouraging its sellers to copy Shein's designs and failing to remove infringing products. The lawsuit alleges Temu uses misleading tactics, including creating fake Shein social media accounts and using Shein’s trademarks in Google ads to lure customers. Temu responded, criticizing Shein for hypocrisy given its own history of IP disputes. Shein seeks a court order to prevent Temu from using its confidential information and to halt its alleged infringing activities. (Source:CNBC)

Indian Telecom's 6G Ambitions:
During the second Stakeholders Advisory Committee (SAC) meeting on Telecom Service Providers, chaired by Union Telecom Minister Jyotiraditya Scindia, Indian telecom players set ambitious goals. They aim to secure 10% of global 6G patents and contribute one-sixth to global standards within three years. Industry leaders proposed aligning research with India's needs and fostering a vibrant standards community. Scindia urged SAC members to define a critical path and roles for stakeholders to achieve these targets. The meeting also emphasized the need for reliable connectivity and a supportive policy framework to drive 100% broadband coverage in India. (Source: Business Standard)

DPIIT’s Copyright Rule Withdrawal: A Win for Content Creators?
The Department for Promotion of Industry and Internal Trade (DPIIT) recently withdrew a 2016 memorandum that aimed to extend Section 31D of the Copyright Act to include internet transmissions. This move is expected to bolster the position of copyright owners, such as record labels, by allowing them to negotiate better royalty rates without reliance on statutory licenses set by commercial courts. The decision follows a Bombay High Court ruling in the case of Tips Industries Ltd. vs Wynk Music Ltd. Experts believe this withdrawal will enhance copyright owners' bargaining power and encourage fair compensation for digital content. However, it may also lead to increased licensing costs for digital platforms, potentially impacting their business models and the availability of music online. (Source: Business Standard)

Aviator LLC Triumphs: $330 Million Award in Landmark IP Case:
On August 20, 2024, the Court of First Instance in Georgia ruled in favor of Aviator LLC, granting $330 million in damages against Spribe OÜ and Adjarabet, a major online casino owned by Flutter Entertainment Plc. The court found that Spribe OÜ had infringed on Aviator LLC's trademarks and copyright by using the “Aviator” logo in its game and invalidated Spribe OÜ's trademarks due to bad faith registration. Additionally, Adjarabet was ordered to cease using the “Aviator” name and image. (Source: Business Wire)

Ajinkya Kottawar's Patent Record:
Vidarbha native Ajinkya Kottawar and his team at AMI Innovations set a world record by securing 13 international patents in a single day, as confirmed on August 6, 2024. Among the patents, 10 are related to turmeric, addressing the challenge of preserving its curcumin content without traditional processing methods. Their innovation reduces processing time from three months to three days and introduces new products like turmeric oil and liquid. Additionally, the team’s advancements in Compressed Natural Gas (CNG) technology cut production time from 80 days to just 16. (Source: TOI)

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