The Big Squeeze: Is India's start-up ecosystem in trouble?

A whole host of start-ups are in the news for a round of cutbacks - Meesho, Trell, among others. But that's not all. Of late, frequent cases of founder fraud are also now emerging - BharatPe of course, Xiaomi, and Zilingo as well to name a few.

These are companies backed by big investors like Softbank, Sequoia and others who are clearly cleaning up their Asian table. Softbank's Masayoshi Son recently told the top leadership of the group to go slow with tech investments.

Softbank's Vision Fund has huge investments in India's unicorns. This sentiment is being echoed across the ecosystem.

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"Start-ups are taking the path to consolidation now and those that were chasing high valuations are now focusing on profitability. High-quality execution business models will be the winners. Big-ticket funding is slowing down and we are bound to feel the squeeze," says one of the country's top investment bankers to Business Today.

Sequoia India managing director Shailendra Singh recently said on Twitter that he was looking forward to a much-needed correction in the start-up funding environment and that thankfully conversations are back to focusing on revenues, products, unit economics, and saving dollars.

Ankiti Bose of Zilingo was, in fact, a Sequoia employee who was later funded by the same venture capital firm. The same positive reinforcement of encouraging employees is now turning into questions on accountability.  
 
So, what's leading to these stories emerging now?

"Liquidity is tightening and it is forcing investors to be more cautious. Questions are being asked. Some of these audits are coming up before a likely next round and big investors don't want to take a risk," says the MD at one of India's biggest VC fund houses, "Investors now want to see meat on bones and not just made-up numbers, they are no longer turning a blind eye. There is a larger message being sent to the ecosystem," the MD adds.

With the backdrop of the impending rate hikes in the US amidst inflationary pressures and recent tech listings that are trading well below IPO price, start-ups are getting a reality check, and are being forced to relook at business plans and feasibility.

It is time for investors to get back in the driving seat and call the shots, keeping valuations also tempered.

Also Read: Indian startups raised $8.4 bn in Q1, 2022; India ranks 4th globally with 96 unicorns
 
The domestic story is extremely strong, according to another VC that spoke to Business Today. "Stock markets, domestic infusion, interest rates are holding strong. Large deals like Swiggy, Dunzo, and Dailyhunt were all done before this sudden slowdown," the VC said.

"It's during May-August that we will see what valuations are looking like for deals that started after this period," the VC added. When asked about the layoffs, he explained that it is at the moment just a case of finetuning across verticals, and these ae planned layoffs, such as those seen at Furlenco and Unacademy, something that can be seen in any industry.

"A start-up can't be expected to reduce their run rate from hundreds of millions to single digits. They have to grow and they will grow. We are seeing massive domestic funds, family offices, invest in private markets. We are going to continue to see big deals in the coming months," he said.

But it is evident that a big question mark seems to be looming over the issue of valuation. And founders are now feeling the squeeze.