In most parts of the world, including India, media coverage and cultural views of tech startups have a bias towards two things: funding and valuation. They are absorbed by how much venture capital (increasingly, debt as well) a startup has raised and what valuation investors have chosen to give it their money.

On both counts, 2021 was a blowout year. Once the 2020 fears of the pandemic subsided with the arrival of vaccines and the money injected by central banks and governments started sloshing around in economies, tech startups became the ultimate beneficiaries of the “new normal”. Edtechs would disrupt physical schools. Fintechs would disrupt physical banks. Streaming platforms would disrupt physical theatres. Delivery services would disrupt physical restaurants.

Thus, both the quantum and valuations (unicorns were being minted every few weeks) of venture funding in India too shot through the roof in 2021.

But things are no longer as bright. Funding, both in its quantum and the valuations at which it is offered, has slowed down significantly.

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Even with the drop, there is still an incredible amount of venture capital flowing through the tech-startup ecosystem, with an even larger pool waiting in the wings.

But why do venture-capital investors put so much money into startups that, in most cases, are loss-making?

This isn’t a philosophical or rhetorical question. They do it to multiply their money and profit from it. And while it can seem odd to chase profits by funding losses, most investors either know or hope that one day those losses will materialise into profits for their companies.

Profits are what companies exist to make. And the hope of greater profits in the future is what drives investor sentiment, whether in private or public markets.

Imagine a black box into which goes investor hope and money, and profits flow out the other side in future.

This black box is a company’s business model. It’s how it operates, earns and spends money, and hopefully generates profits.

Market intelligence and research platform Tracxn, in its Top Business Models report, analysed the venture funding that has gone into India’s tech startups (up to June 2022) using the prisms of 50 distinct business models.

Using these prisms helps us understand: which business models seem lucrative to investors, resulting in them investing in companies that operate with the same.

Remember, the objective of a business model is to make profits. And so is the objective of venture-capital funds. Thus, looking at the flow of venture capital to business models allows us to observe bets being made on the likelihood and the ease of generating profits in the future.

What does it say?

Funding storm to silent winter

The chart below shows the number of funding rounds in a specific business model over the year.