India’s start-up story is facing strong headwinds. Winter is coming

Reality is hitting home now. Indian start-ups, for long the subject of animated discussion in corporate circles owing to soaring valuations and a surfeit of funding, are now facing torrid weather. 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. Earlier this month, storied food delivery decacorn Swiggy announced it was scaling down its Supr Daily service and suspending its Swiggy Genie service as operational stress begins to bite. Alongside, a number of start-ups have also begun to let go of employees. Cars24, Meesho, Blinkit, Unacademy, Vedantu, Trell, OKCredit, Lido Learning and others are among a host of start-ups which are reported to have laid off employees as the start-up ecosystem faces rough weather. According to estimates, the total number of those who have been laid off over the past weeks is upward of 5,000.

Contrast this with 2021, when people the world over, and in India, were gushing over the number of unicorns India was creating, almost one 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, India is home to 100 unicorns with a total valuation of $332.7 billion.

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, 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, who I reckon as 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, Ganesh tells me, 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, since longer upcycles mean steeper falls when the music stops. Ganesh points out that these cycles have been taking place for decades, and are nothing new. The reason why it may be hurting more is because 2021 was the year when the upcycle went to steep heights.

True. Last year was, as data shows, a year of unprecedented highs and excessive valuations. The damage, then, will be greater. Founders, Ganesh argues, should not really be blamed for what’s happening now. Founders are eternal optimists whose job is to ride the wave when the opportunity arises. When the wave falls, it is inevitable that some will fall with it. If you want to hit a six, there’s a good chance you may also be caught at the boundary. Another aspect which he points out is that even if one were to assume 5000 or thereabouts as the number of people laid off in this round of correction, it will still be a minuscule part of the number of jobs Indian startups have created. The 100 unicorns India now has are estimated to have created nearly 13 lakh jobs, by rough estimates. 

But all said and done, 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. This tough phase, most reckon, would last anywhere between 9 to 18 months, when valuations would become far more realistic and funding would take longer to close. Founders will now need to plan for double the time for funding deals to finally happen. If you’re wanting to raise ₹50 crore in three months, plan to raise half that amount in three times the time, founders are being warned by investors. The bottom line: ensure survival of your start-up for the next nine to 12 months at least. Importantly, there’s no real villain here. The global environment is not conducive and founders need to realise that and prepare themselves.

If funding continues to be a problem, instead of looking for new investors, it’s better to go back to the existing investors and ask for support to tide over the problematic next few months. No one new will want to come in at this juncture, since nobody wants to catch a falling knife. But existing investors who know the founders and have a relationship with them will be willing in most cases to step in. Sanjay Mehta, a well-known venture capitalist, tells me it is most important for founders to maintain the best relationships with investors since supportive investors may even be willing to sacrifice a bit and stand shoulder to shoulder with smart founders who they have known for a while.
An important aspect in all this is the mix of investors in start-ups. If a start-up is funded by the usual VC and PE lot, there may be some relief for the founders. This is because these funds raise money and must invest in order to give the returns expected by their limited partners (LPs). VCs and PEs, which have raised funds, cannot keep them idle and the money has to be invested after a point. 

After the knife has fallen, it must be picked up! However, hedge funds and crossover funds which have invested in start-ups will not be able to guarantee when they will begin investing again, since they also invest in the public markets. As the public markets see a decline, and their holdings are hit, they will find it even more difficult to resume investing in the private markets. Those start-ups which have investments from such funds will be hit harder since the time horizon of 12-18 months may not apply in their case, and the wait could turn out to be much longer.

There are also other reasons why some start-ups are facing problems. 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.

Every adversity is a test of true mettle. For founders, it is how they navigate the tough times, how they quickly pivot to new verticals, and the way they manage their relationships with investors. For investors, often seen as the drivers behind crazy valuations, it is also a reality check. The key, as Mehta tells me, is to invest in enduring businesses and ensure they support the correct founders and see them to success. As the adage goes, tough times don’t last, tough people do. It’s time for start-up founders to toughen themselves for now. Winter is coming.

The author is Editor, Business Today.

 

Also Read: Adani and Ambani: The big ambitions of India’s biggest billionaires
 

Also Read: Hotels, airlines, restaurants are full: Services could cushion the blow to GDP