In India, every second person wants to become an entrepreneur. Startups are the way to realise this dream and it is no coincidence that we had emerged as the world’s third largest startup ecosystem with over 1.25 lakh startups and over 110 unicorns.
The trajectory in the last 18 months has seen a slowing down of this dream. There has been a fall of revenues and a corresponding funds squeeze, putting many well-established and nascent organisations under pressure. The squeeze began being felt from early 2023. Several startups have had to close shop while many of the more successful ventures now find themselves struggling to stay afloat.
In 2023, there has been a nearly 73% decline in fundraising. Investments in these companies which slumped to $ 7 billion as compared to $ 25 billion the earlier year. According to Traxcn Technologies, India dropped to fifth position in 2023 amongst the highest funded nation from being ranked fourth in 2022 and 2021.
An executive working in a startup supplying trained manpower to NGOs said, “Investors are no longer writing cheques in a hurry. Ours is an all-women venture and we have already spent Rs 1 crore with funds being raised by the team members at a personal level. But when we approached a venture capitalist for funding, we were informed that we needed to raise our company to a higher level before they would consider us.”
The other problem is the government’s decision to tweak its Foreign Direct Investment rules which have created unnecessary roadblocks for these young companies.
Chinese companies have invested in Indian technology start ups. In 2019, stats show that over 75 companies were the recipient of Chinese investment. Amongst these, the better- known companies were Big Basket, Paytm and Ola.
The reason quoted by the government for putting roadblocks on Chinese investment was that this was being done for national security. But what are the security implications if Chinese money is invested in a taxi aggregator like Ola, asks a financial expert. All these companies have been put in a tight spot but with the RSS having put pressure on the government to put a brake on Chinese investments, this has created a major impediment in funding for several companies.
Chinese companies had invested $8 billion in several ventures and another $4.4 billion in greenfield ventures. However, Amitabh Kant heading Niti Aayog has issued a statement clarifying that the Indian government welcomed all investment including Chinese monies.
Kant said at a press meet, “We greatly welcome Chinese investments. Nowhere have we said that we are going to constrain China’s investment. They have been a big player in India’s startup story, they have greatly invested into India, we welcome them.”
But these assurances are not working all that smoothly on the ground. Prof Deshdeep Sahdev who earlier taught at IIT Kanpur, and whose company is presently supplying cutting-edge equipment to ISRO, believes, “There was so much hype around these startups. Take the example of Byjus which grew enormously during the Covid period into onto one the world’s largest ed-tech companies and was valued at $22 billion in 2022. This made them ambitious and they acquired a number of American edtech startups at very high prices.”
The problem was that once schools restarted post Covid, Byjus saw a decline of customers. Their problems got further exacerbated because of a legal dispute and financial mismanagement leading to a default of a $1.2 billion loan. The owners have now had to mortgage their personal properties to secure a loan to pay employees salaries.
Other external and internal factors have hit the world of start ups. Global events including the Russia-Ukraine conflict and the Israel-Palestine conflict have created uncertainty in the global supply chain and trade outlook which in turn have affected investor confidence and capital flow. Investment in unicorns took a hit, and investors are now looking at late stage startups that prioritise growth over profitability. A longer gestation period is bound to affect the functioning of startups which are totally dependent on investments to expand their area of work.
Within India also, there has been a churn. Domestic pension funds are not interested in investing in startups. Despite Prime Minister Narendra Modi promising support to young entrepreneurs, there has also been a lack of support from the government with the Reserve Bank of India restricting banks and non- banking financial companies from investing in Alternate Investment Funds which several entrepreneurs have described as an “authoritarian” step.
The result of all this churn has been that companies are resorting to “silent layoffs”, encouraging employees to leave rather than implementing explicit layoffs. Already over 42,000 employees have been laid off in Bengaluru alone. The edtech segment holds the worst record, with 19 startups laying off more than 9,000 employees. Last year, Byjus laid off 2,500 of its staff starting October 2022. In June 2023, it laid off another 1,000 as part of a “restructuring process”.
Ola Cabs, in the face of increasing competition from electric cabs, has had to cut down its staff by 5% while Dunzo is struggling with major financial losses and is presently finding it difficult to keep its operations afloat. Unacademy which faced a great deal of volatility is hoping for a turnaround. Last year its founder Gaurav Munjal tweeted that the number of its learners went up from 6000 to 32,000 and “its cash burn was reduced by 60%” helping reduce its losses by 39%. All in all, almost 40,000 employees lost their jobs from 130 startups.
The Financial Index Report 2023 while analysing 74 unicorns found that 55 of them had incurred a cumulative operative loss of $5.9 billion in 2022. This was double the loss that 53 companies had incurred in 2021.
Experts point out that till two years ago, there was much more money available in the market and the market sentiment was all about chasing growth. The market dynamics have however changed in the last two years with venture funded IPOs having not performed so well.
Meanwhile, there has been a significant markdown in valuations. In June this year, Prosus, the biggest investor shareholder in Byju’s, cut its valuations by over 75% — from $22 billion to $5.1 billion. Invesco brought down Swiggy’s valuation from $10.7 billion to $5.5 billion and Ola’s valuation has also dropped by around 35% to $4.8 billion.
Why did this crash landing take place? The start-up boom in 2020-21 came at the height of the Covid pandemic when there was an unprecedented boom in demand for online firms in several services such as education, food, entertainment, lifestyle, and health and hygiene. Experience has shown that it can take anything up to ten years to build a business. Initially, youngsters straight out of IIT were receiving a lot of money to start a business. Since they were not using their own money, misgovernance followed. Some startups treated VC money as “free money” they could binge on. Sam Bankman-Fried was one of the richest people in crypto, thanks to his FTX exchange and Alameda Research trading firm, before his empire came crashing down in November 2022. It was a stunning fall from grace for Bankman-Fried who had at one point even been heralded as a modern JP Morgan. But such was his decline that he had to file for bankruptcy for FTX.
Few companies symbolise the ups and downs of this world of startups more than the fashion start-up Zilingo started in 2014 by Ankita Bose and her partner Dhruv Kapoor, who began by creating a joint outlet for fashion retailers from Bangkok, Jakarta and Singapore. Their success can be gauged from the fact that four years later they succeeded in raising $226 million from prominent investors including Temasek Holdings and Sequoia Capital India, the regional arm of the Silicon Valley firm that backed Apple and Google. Their valuation touched $ 970 million, just short of the $ 1 billion mark that would have brought it into the category of a unicorn.
Ankita Bose, it is learnt, upped her salary ten times over and was a profligate spender. In just two years, the money was gone. Last April, she was suspended and then fired but the company had to be sold at a loss.
Prof Sahadev regrets that most of the startups have been in the service sector and not in the area of manufacturing and technology where much more expertise is required. He cites the example of Google and Apple, both of which started in a garage and which have helped transform the world of technology across the world.
Venture capitalists have tightened their belts and are going to do much more diligence before investing their money in a new outfit. Startups also realise they need to monitor their cost base much more carefully in order to ensure the business can pay for itself. The free ride is long over.
The writer is an entrepreneur and consultant focused on IT in hotels and corporates, and follows car and tech trends across the globe
