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Artificial intelligence (AI) was termed the most hyped sector among startups in 2023 while manufacturing and business-to-business (B2B) focused sectors were underrated, according to a report by venture debt firm InnoVen Capital.

Around 23% of respondents believe that AI will have a significant impact on their business models over the next 2-3 years, InnoVen Capital’s India Startup Outlook Report found. This comes as an increasing number of startups adopted AI in their offerings last year. Indian generative AI startups raised over $475 million in funding between 2021 and May 2023, as per a NASSCOM report.

InnoVen Capital’s report is a collection of insights from 100 startup founders across stages and sectors including fintech, ecommerce, healthtech, and SaaS, among others.

The report also identified fundraising trends prevalent in the startup ecosystem in 2023. About 68% of founders who attempted had a favourable experience last year, down from 71% in 2022. Also, 74% of founders are optimistic about the funding environment in 2024 as opposed to 42% in 2023, according to the report.

At least 64% of entrepreneurs looked at an initial public offering (IPO) as a preferred mode of exit—up from 63% in 2022. Preference for mergers and acquisitions continued a downward trajectory, falling to 22% from 28% in 2022. Overseas IPOs are also not preferred anymore, the report found.

Most founders believe that focus on building sustainable business models has been a key impact of the funding slowdown, echoing the same sentiment as last year. The tightening funding environment has also led to a correction in valuations, the report added.

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Despite the sluggish funding environment, 85% of founders are optimistic about raising their next round at a higher valuation this year, compared to 75% last year. However, 20% of growth- or late-stage founders expect a flat to a down round.

In terms of workforce expansion, 61% of founders expect the pace of hiring to stay at the same levels or go down compared to last year.

However, gender diversity in leadership roles continues to be a challenge. About 75% of companies have less than 20% women in leadership roles, and 45% have less than 10% women in their leadership team, as per the report.

“2023 was yet another challenging year for the startup ecosystem, with a weak funding environment and a tough global macro. On the positive side, we are now seeing a higher appreciation for sustainable business models, more focus on unit economics, profitability, and realistic valuation expectations,” said Ashish Sharma, Managing Partner at InnoVen Capital India.