Watching Every Penny: The State of Indian Start-ups

“India is now home to 75,000 start-ups in the 75th year of Independence and this is only the beginning,” Union Minister Piyush Goyal tweeted on Wednesday, August 3. The growth of India’s start-up landscape over the past decade has been outstanding and impressive. The third largest start-up ecosystem in the world smashed all previous records of funding volumes and unicorn creation in 2021.

Come 2022, the growth machine has slowed to a grinding halt. Entrepreneurs are waking up to the virtue of frugality once again, as easy money dries up and venture capital tumbles. This July, Unacademy Co-founder and CEO Gaurav Munjal said the company must “embrace frugality” as a core value to become cash-flow positive. “Until now we have never had frugality as one of our core values. Honestly, since we were focussed on growth and the fact that we had raised millions of dollars of capital it [frugality] wasn’t a priority,” he wrote.

Munjal isn’t alone. The call for frugality is now heard echoing across the start-up landscape. Most start-ups are unprofitable. In a growth market, investors fund them to scale up first before aiming for profitability. However, a combination of global macro events including rising inflation, supply chain disruptions due to Covid-19 and the Ukraine conflict, and the ongoing correction in public markets have brought a degree of caution. Consequently, investors are reminding companies that ‘cash is king’ and it’s time they conserve cash and extend the runway as far as possible.

“Frugality is about not going overboard on anything where the returns are not beyond reasonable doubt and [includes] expenditures of discretionary nature like non-essential hiring, lavish offices and off-sites, business [class] travel, etc. If a business needs to shed flab, it needs to take a look at every discretionary spend,” says T.N. Hari, Co-founder of Artha School of Entrepreneurship and former CHRO at bigbasket.

And it’s happening. New-age tech companies that accounted for a majority of last year’s Indian Premier League advertising have toned down their TV exposure. More than 11,000 jobs have been slashed across start-ups including Ola, BYJU’S, Blinkit, Unacademy, Vedantu and Cars24 as companies began to shred fixed costs and create a longer runway. Front-loaded hiring has come to an end. Salary packages have either shrunk or stagnated.

“Last year, growth was primary; profitability was secondary. This year it has reversed. Once that mindset shift happens, decision-making becomes easier. Suddenly you will start looking at marketing costs, which were bringing growth but not profitability. You will optimise hiring, stop experimenting with new projects and prioritise ruthlessly,” says Darpan Sanghvi, Group Founder & CEO, The Good Glamm Group, a content-to-commerce platform that entered the unicorn club after raising $150 million in its Series-D round last November. Much of that money, Sanghvi says, is still in the bank.

Padmaja Ruparel, Co-founder & President of Indian Angel Network (IAN), says daily monitoring of the status of cash is essential for early-stage companies, and it needs to be done by the founder or CEO. “It is important to collect payments against the revenues. ‘High receivables’ is a drain on cash flows and a daily focus on collecting is essential. Optimum quantum and time for ordering components/supplies, any extraneous expenses, credit periods provided to suppliers, etc., all need to be relooked at,” she says.

Cash conservation is critical, but that also means businesses won’t grow at the rate witnessed a year ago. “Growth will be tempered, we won’t do growth at the expense of being unprofitable. Earlier, my budget was to scale about 5-6x this year, we will now scale at 3.5x,” says Sanghvi. Adds Vineet Rao, Co-founder and CEO of social commerce start-up DealShare: “Last year we grew like 13 times our annual GMV (gross merchandise value); [we] grew from $60-$70 million to about $1 billion. Next year, if it was still a growth market, we would have grown very handsomely but we are looking only at modest growth over this year.”

Rao says a cap on spending has resulted in over 40 per cent reduction in his company’s monthly burn compared to its spending in March 2022. “We have significantly brought down our monthly burn levels so that we have more than three years’ worth of runway. Many start-ups are doing it,” he says.

Times like these force start-ups to introspect and do structural corrections such as defining the right organisation structure; calculating RoI on people, processes, technologies, training and development; and identifying and resolving operational design inefficiencies around warehouses and office space to facilitate organic growth.

The Good Glamm Group, which did 11 acquisitions since 2021, has accelerated the consolidation of companies it acquired. “We had initially planned to do these consolidations by this December leading into March next year, but now we have started it in July. This helps us remove role redundancies and enables us to optimise resources and other overheads,” says Sanghvi, adding that the company has pushed new category launches to next year, and slowed down offline expansion. DealShare’s Rao, too, says the focus is to make select regions fully profitable before expanding to new geographies.

“Where companies typically cut costs is the pace of expansion and spend on marketing and, therefore, customer acquisition. When you expand beyond your core markets, you employ people and invest in infrastructure even prior to revenue build-up. These are two large areas of cost cutting,” says Angshuman Bhattacharya, Partner and National Leader, Consumer Product and Retail Sector, EY India, adding that a slowdown also results in widening of the distance between category leaders and others. “One of the inevitable outcomes of a downturn is that leading companies across segments move far ahead. The problem is for the rest of the players. A steep gap is developing between the No. 1 and No. 2 in many segments,” he says.

Well-capitalised companies are also looking to snap up smaller ones that are struggling to raise capital to fight competition. Investors, in select cases, orchestrate consolidations to get something out of their investments. Sanghvi says valuations have dropped nearly 30 per cent while Rao says he expects a lot more M&As to happen in three to six months. Both are currently exploring acquisition prospects. “Downturns are as inevitable as upturns, and preparation for dealing with them before they strike is essential. Just because you have raised money does not mean you need to spend it in mindless M&As, unsustainable market creation, or reckless hiring,” warns Hari, who has seen start-up journeys from close quarters with TaxiForSure and bigbasket.

In times like these, entrepreneurs need to stick to the old adage of ‘plan for the worst and hope for the best’. 

@binu_t_paul