India’s Start-Up Story: Reality Bites
STORIES, ANALYSES, EXPERT VIEWS
Valuations and adequate funding had India’s Strat-ups climbing heights. Now are now facing torrid weather, according to Sourav Majumdar (Editor, Business Today). “As funding begins drying up, start-ups are being forced to look carefully at business plans and the road to profitability. Over the past several weeks, the constant story around start-ups is that of layoffs and, in some cases, suspension of operations of certain verticals owing to pressures.” According to estimates, the total number of those who have been laid off over the past weeks is upward of 5,000. However, this is a minuscule number since the 100 unicorns India now has are estimated to have created nearly 13 lakh jobs, by rough estimates.
In contrast, India was creating, almost one Unicorn every other day. Across sectors, funds and investors were chasing founders, driving up valuations and creating billion-dollar companies. As many as 44 unicorns were created in 2021, with a total valuation of $93 billion, as per Invest India data. This year has seen 14 unicorns being created so far, with a total valuation of $18.9 billion, according to data as of May 5. As of that date, the 100 unicorns have a total valuation of $332.7 billion.
Funding drying up: also rising global interest rates, geopolitical tensions creating problems
According to Tracxn data, 2021 saw a hefty $51.1 billion being raised by Indian start-ups, by way of as many as 3,070 funding rounds. In contrast, data available till May 24, 2022 shows that $19.77 billion was raised so far in 2022, through 902 rounds of funding. Clearly, says Majumdar, “the funding tap is showing signs of drying up, and start-up founders are acutely aware of this. A dangerous cocktail of rising global interest rates, geopolitical tensions and the hit being taken in the public markets by some storied marquee investors has started telling on Indian startups and the private markets. Recently, Sequoia Capital, one of the world’s largest venture capital firms, warned investee companies of a prolonged downturn, and said it would not lead to a quick, V-shaped recovery like was witnessed at the onset of the pandemic and after. Similar warnings have been sounded by other major VC and PE firms, asking investee companies and founders to begin tightening their belts in right earnest.”
Krishnan Ganesh, a serial entrepreneur and promoter of BigBasket, Portea Medical, and Homelane, one of the keenest observers of the startup ecosystem, points out that private markets, like public markets, go through ups and downs. The party has to end sometime, says Ganesh, adding that it’s necessary after the party to detox, recharge and take a break before beginning the next party. That, in his view, is what’s happening right now in the startups space. Of course, the shorter the cycles of ups and downs, the better.
But all said and done, Majumdar writes “the problem is real. Start-ups are facing challenging times. Investors tell me that deals are now taking much longer to close and the days when founders would be chased by them, and deals would be closed in minutes after Zoom calls, are behind us. Expectations are being tempered, and quickly…..”
Pandemic ending posing issues
There are also other reasons why some start-ups are facing problems, says Majumdar. “The tailwinds which drove many start-ups during the pandemic have now started weakening, or even vanishing, now that the pandemic is receding. For instance, during the height of the pandemic, ventures making masks in Tiruppur, or sanitisers elsewhere may have mushroomed. Similarly, edtech and healthtech ventures, which saw major tailwinds during the lockdowns and the peak of the pandemic, will undoubtedly see a waning of demand as people get back to visiting doctors’ chambers in person, or children get back to school now that schools and colleges have reopened. To that extent, these ventures will also be affected, leading to layoffs and other restructuring measures. As demand had soared, many ventures hired to keep pace. Now, post pandemic, as demand wanes, the reverse will hold true.”
