The government’s ban on Chinese short-form video app TikTok in June 2020 saw the birth of a series of similar domestic platforms such as Trell, Roposo, ShareChat’s Moj, Chingari, and VerSe’s Josh. All of them saw high investor interest. However, today none of them are a force to reckon with, having failed to fill the void created by TikTok’s exit, with even investor interest dwindling.
Prominent VC firms such as Tiber Global, LightSpeed Venture, Qatar Investment Authority and Peak XV had put in $65.8 million into these companies at the peak of the funding boom in 2021, and then $29 million in the year that followed, as per Tracxn data. However, the companies failed to capitalise on the opportunity and are now struggling with rising costs, declining engagement and user retention.
While Trell and Roposo have pivoted largely towards a content-to-commerce business model, the rest are still trying to compete with giants such as Meta’s Instagram to capture the short-video market. To achieve profitability in such a scenario, Chingari had reportedly fired about 50% of its workforce late last year, while Moj’s parent Mohalla Tech’s losses jumped 38% to Rs 4,000 crore in FY23.
As a result in 2023, short-video apps received zero funding from investors.
This trend is not limited only to the short-form video segment. There are several other sectors that have lately fallen out of favour with the investor community. Startups in sectors such as web3, ed-tech, gaming and cryptocurrency have suffered a massive decline in investments compared to the overall funding slowdown.
For example, ed-tech funding crashed to $297 million last year, compared to $2.6 billion the year ago and $4.1 billion in 2021. That’s nearly a 90% drop in funding from 2022, compared to a broader decline of about 70% across tech startups.
These sectors can largely be put into two buckets, according to Ashish Sharma, managing partner at venture debt firm InnoVen Capital. One includes sectors that saw significant tailwinds in the post-pandemic world, driven by changes in consumer behaviour, such as ed-tech, short-form video apps, casual gaming. The other category includes sectors that are facing some regulatory headwinds, such as cryptocurrency, web3 and real money gaming. “The ‘Covid darling’ sectors attracted a lot of capital over a short period of time but once Covid waned, investors realised that they had overestimated the pace of consumer adoption and the market size,” Sharma added.
Rohit Krishna, general partner at WEH Ventures, agreed that the sectors that saw some tailwinds associated to Covid raised multiple rounds before having to prove any hypothesis. He added that investors are now waiting for these companies to show signs of product market fit and sustainable unit economics before they can raise more follow-on capital.
Some of these sectors have become unattractive to investors also because of market saturation, or lack of profitability and uncertain demand or intense competition.
As for ed-tech, the sector had seen its fair share of unicorns and bumper investment rounds during the pandemic years, when shifting education online was necessary because of lockdowns, but the host of ed-tech startups that cropped up failed to understand how long such demand would persist.
“While D2C ed-tech platforms were a good play, funds have now realised that beyond a point you can’t replace school and the formal form of education. Moreover, the market is small and too many players have entered overestimating demand,” said Saloni Jain, founding partner at Sunicon Ventures. She added that funds are unlikely to invest in new ed-tech companies now, since current companies are not able to grow as they had projected.
During its booming years ed-tech gave birth to a series of unicorns such as Byju’s, Unacademy, PhysicsWallah, Vedantu, Eruditus, and upGrad.
Similarly, a rally in Bitcoin prices in 2021 had attracted investor eyeballs towards web3 startups working with blockchain technology but as the crypto winter set in in 2022 and cryptocurrency prices crashed, so did the funding in these startups in India.
Tracxn data showed funding in web3 and blockchain startups fell to $36.3 million last year from $289.4 million in 2022 and $534.6 million in the year before that. However, investors expect this sector to see renewed interest in the near term as Bitcoin prices recover.
Other than these, some investors are also getting averse to direct-to-consumer brands, where the market is over-crowded and intense competition is making it difficult to achieve profitable unit economics. Even though the pandemic years had seen a flurry of D2C brands raising capital at sky-high valuations, investors are now questioning their product-market fit and high cash-burn models.
“The initial hype around D2C brands offering convenience and niche products is fading. Intense competition and challenges in building profitable unit economics may cool investor interest,” said Karan Verma, co-founder and director at FAAD Network.