The e-commerce sector is undoubtedly one of the strongest foundations of the Indian startup ecosystem, with more than 790 financed firms operating nationwide, the highest number of unicorns, and financing deals.

Seed Funding For the E-commerce Industry

By the end of the decade, India is expected to have more than 1.3 billion internet users, 500 million of whom would be e-commerce customers, according to Inc42’s “Indian Tech Startup Seed Funding Report, 2022”.

Here are a few facts:

  • Compared to $10.7 billion in 2021, Indian e-commerce firms were only able to raise $4.01 billion.
  • Growth-stage capital decreased 25% to $947.88 from $1.25 Bn raised a year earlier, while late-stage seed funding in the e-commerce industry plummeted 71% YoY to $2.65 Bn in 2022.
  • Two of the largest subsectors, D2C and B2B, appeared in 2022, raising $1.65 billion and $1.47 billion, respectively.

What happened in 2022?

Without a doubt, 2022 is remembered as when investors went back to their caves, along with everything that followed that — layoffs, closures, and consolidations.  It was a transitional year for e-commerce, though, and it served as a reminder of how important it is to have solid company fundamentals, great unit economics, and a clear route to profitability.

 Many e-commerce players realized they were on a precarious precipice by relying on external funding or runways as investor funding declined, which compelled them to make cost-cutting decisions. It is interesting to note that many people lost their jobs while marketing expenses remained high to

 draw in, additional clients.

Unexpectedly, there were some bright spots. E-commerce startups had a successful year in terms of revenue in 2022, particularly during the holiday shopping season. Redseer said that during the first week of the holiday season in 2017, e-commerce businesses with operations in India made sales of $5.7 Bn.

Additionally, traditional players like Amazon, Tata, and Reliance were outsold by online retailers like Flipkart and Meesho in terms of the volume of orders they received throughout the holiday season. In the first week of the holiday season in 2021.

The network employs an open-network model that is not constrained to a particular platform to provide smaller companies the opportunity to market their products and services more effectively online. With a buyer app for customers and a seller app for sellers, the ONDC functions as a platform and builds a value chain.

The ONDC is in for a lot from the government. The ONDC expects the network to have 900 million buyers, 1.2 million vendors, and a gross merchandise value (GMV) of $48 billion within the next two years. Although the digital commerce project has already been piloted in Delhi, Bengaluru, and Meerut, it has received lukewarm initial feedback due to several operational difficulties. 

Obstacles Faced during seed Funding for Startups

  • Discounted house – India is a price-sensitive market. Discounts have been a key tactic for industry leaders like Amazon and Flipkart over the years to attract substantial VC funding and grow their businesses. However, this strategy ultimately hurts the smaller players’ balance sheets.
  • Managing returns: The majority of online stores give a 30-day window in which a client can use a product and then return it. It might be difficult for tiny markets to sell damaged goods since returned goods can occasionally be damaged.
Seed funding - managing return
  • Cost of unsold inventory: According to Randev, most seed-stage businesses use pre-purchased inventory-led models and have 15% unsold inventory annually on average. Their path to profitability is impacted by the price of holding this unsold inventory, labor costs for the warehouse, insurance, and security.

To Wrap Up

This appears to be the case, though, in every other industry and stage of startup. Investors in the e-commerce sector are anticipated to continue betting on seed-stage firms, but with a bigger ticket size, as experts predict a financing winter of at least 18 to 24 months, and many late-stage startups aim to decrease costs to lengthen their runway.

Data from Inc42 shows that from about $0.5 million in 2014 to $3.2 million in 2022, the average ticket size of investment for seed-stage e-commerce firms has grown. The epidemic and the market cycles of today’s entrepreneurs are predicted to cause them to focus on unit economics from the start, luring investors to stake larger bets at the seed stage.

E-commerce is one of the select few startup industries that has advanced to the point where businesses may charge customers for convenience, making profitability a more realistic possibility than in certain other industries, including finance. The development of the industry in the nation would also be aided by government programs like Digital India and ONDC as well as upcoming regulations for e-commerce.

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