VC trends for 2024: Interest in AI startups, cutbacks on Customer Acquisition Cost

Indian startups are focusing on cutting down customer acquisition costs and focusing more on customer retention, said Vinay Bansal, Partner at Physis Capital. He added that tier II and III cities have taken center stage in terms of talent and outsourcing as they are relatively more economical for startups that are trying to cut down costs.

Tips to survive the funding winter

He said: “During a funding winter, startups focus on cash optimisation, streamlining operations, and employing proven marketing strategies for efficient customer acquisition and retention. Prioritising runway extension over capital intensity becomes crucial for long-term sustainability, requiring postponement of massive capital investments.”

“Founders must shift their focus to revenue generation, emphasising lower CAC and higher customer retention for sustainable growth. On the investor side, diligence for ambitious founders is essential, requiring rigorous due diligence to identify companies with maximum potential for success,” he added.

CAC stands for Customer Acquisition Cost. It measures the amount of money an organization spends to acquire new customers.

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Talent from tier II and III cities

Bansal also explained the interest in talent from tier II and III cities. He said: “The salary expectations for talent in these areas are also less, making the talent pool more affordable for startups. This cost advantage is a crucial factor in the success and sustainability of startups in these regions. This data signifies more than just statistical trends; it signals a paradigm shift in India's startup narrative.”

The VC added that tier II and III cities are also becoming hubs for emerging startups. “India's startup revolution is no longer confined to metropolitan areas, as tier II and III cities take center stage. With at least one recognized startup in every State and Union Territory, and half of them thriving in smaller cities, a significant shift in the entrepreneurial landscape is evident. Spread across 640 districts, these startups are creating over 7 lakh jobs. The economic impact is substantial, highlighting the role of startups in  job growth in regions often overlooked in the past.”

As per data from the Ministry of Commerce and Industry, 50 per cent of the recognised startups in India are now from tier II and III cities.

Funding trends for 2024

Talking about funding trends for 2024, the VC mentioned that AI startups will remain in the center stage in the coming year as well.

He said: “Moving into 2024, AI startups continue to captivate investors, offering solutions in healthcare, finance, autonomous vehicles, and more. The VC space anticipates a resurgence, driven by increasing industry pressure to integrate AI into operations.”

It is worth noting that despite the ongoing funding winter for startups, AI startups have been able to raise funds irrespective of tough market conditions. Funding for AI-related startups surpassed $68.7 billion in 2023, according to PitchBook, with generative AI startups like OpenAI, Stability AI, and Anthropic getting big-ticket checks.