Product-driven startups are now investors’ top choice

As the startup ecosystem in Gujarat has begun to mature and the optimistic funding rounds have dried up over the years, investors are increasingly becoming cautious in choosing where they put their money.
Even though service sector startups were the apple of investors’ eye over the years, especially since Covid-19, product-based startups are the new favourites.
According to the Union ministry of commerce and industry, 18,192 startups are registered in Gujarat, of which merely 7,663 are in the services sector whereas the remai ning 10,529 are in the products, device, and technology offerings space. Of these, at least 7,300 are registered under the department of promotion for industry and internal trade (DPIIT).
Investo rs and venture funds have supported product and technology-based startups, especially over the last year and a half.
For instance, Ahmedabadbased startup, Redicine Medsol, raised Rs 80 lakh in a recent round of funding and they’re in the process of raising more funds soon. “Our startup was founded in 2020 and we took nearly two years to develop a product – a smart pill box for chronic patients, which essentially reminds them to take their medications regularly.
By connecting with an app, it also enables generating a report on whether patients have taken medications regularly. I believe if one identifies the need gap and innovates in the product space, it surely yields better returns even though it is a time taking and challenging process to develop the product. We also had the first mover advantage,” said Kush Prajapati, founder, and CEO, Redicine MedSol, which has also recently collaborated with USbased distributors for retailing their product.
Ahmedabad-based ed-tech product startup, Saarthi Pedagogy, has recently raised Rs 10 crore from GVFL at a valuation of Rs 188 crore. The startup has seen a jump of around nine times in its valuation since 2020.
Sushil Agrawal, founder, Saarthi Pedagogy said, “Till now we have raised $4. 7 million in total from 2020 till date. The initial funding came at a valuation of Rs 32. 68 crore followed by Rs 160 crore valuation in March 2022. And the latest valuation for 1. 6 million is Rs 188 crore. I have decided to develop a product tha t can solve customers’ problems. If such products are available at competitive rates, the business is scalable, and investors also join. ”
Kanishk Patel, founder, WeHear said, “We have develop ed a product which enables deaf people to hear properly. We studied the market deeply and developed a better product that solves the problem without surgery. Last year, we were at the pre-reven ue stage, and at that time we raised funds at a valuation of Rs 50 crore. In the last one year, we have sold some 8,500 units of our product and reached the breakeven stage. Now, we are in the talks of getting a new fund at a much higher valuation. ”
Innovations, more viable products stand better chances of survival
Investors indicate that products that are innovative and have long-term viability tend to get investments easily. “Since Covid, technology startups gained significant traction with an increased focus on digital transformation globally. At such times,many product-based startups which have come up with tech solutions for industries at large have gained better investments and are sustaining their funding cycles,” explained an Ahmedabadbased investor on condition of anonymity.
Arjun Handa, chairman, Claris Group said, “Product startu ps are doing better because people are trying new products. Service is a transaction and easily replaceable, but the product is consumption and repeat orders are more. Startups are comi ng out with unique products in various sectors like organic cosmetics or healthy foods and they are getting a good market. We have invested in around 40 startups through our entity — Claris Capital — directly and indirectly and around 70% of them are product startups.”
Besides the innovations, the government’s push for attaining self-reliance in certain sectors like defence and aeros pace is also driving funding for startups. Sandeep Shah, managing director and CEO, Optimized Electrotech, said, “We recently closed a funding round by raising Rs 20.6 crore in March this year. Defence is certainly a capitalintensive business and product development does take time. However, once the startup is past that challenge and investors see potential and sustainable applications in newer sectors, funding becomes easy. The government’s constant promotion of making India self-reliant in defence manufacturing is giving startups like us a huge impetus.”
Along with product-based startups, yet another segment that is gaining traction includes direct-toconsumer startups, which are doing well and getting hefty investments.
Dhruvin Patel, an angel investor, said, “We see that startups have become realistic and practical in thelast one year as far as valuation is concerned. Earlier, startups had multip le funding options but now the situation has changed. Good startups are still getting enough funding but not all startups get easy funding now. Startups are planning expenses more m inutely and focusing on profitability as they now realize that they can get more funding based on the profitability.”
Funding-winter makes investors tread with caution
Even as 2021 was a strong year for Indian startups with investors ready to park funds, investors are now more reluctant. As the funding-winter effect has spilled over into the first quarter of 2023, due to adverse macroeconomic impacts, investors are treading with caution.
“Over the years, the multiplier effect of investing in earlystage and growth-stage star tups has reduced in the same sectors. For instance, ed-tech startups which raised a humongous amount in funding soon after Covid-19 have now failed to raise funds in the subsequent rounds. Su nrise sectors like clean energy, electric mobility, and healthcare technology which largely have product-based offerings are raising more funds compared to the others,” explained Umesh Uttamchan dani, co-founder, DevX.
Echoing a similar view, Kamal Bansal, managing director, GVFL, said, “There is a significant change in startup activities over the last two years. In 2020-21, funding was easily available even at the ideation stage. Gujarat has always seen a comparatively better situation on the startup front as the state has not seen huge cash-burning startups.”
Early-stage funding is not still difficult, but series A and series B funding has become difficult. “Investors are studying all the details including revenue and profit margins before taking a final call. Market acceptance and visibility have emerged as crucial parameters for funding in the startups in the last few years,” Bansal further added.