Venture Capital

Winter Showed Up Early For Indian Startups This Year

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The Startup Story Till Now

The VCs have raised billions of dollars to invest in Indian startups. The fundraising spree has been typical for these new-age tech and tech-enabled startups in India at excessive valuations.

India has over 1 lakh startups, growing four times from 2012. According to a Bain & Co. report, India was amongst the top five startup ecosystems in the world. Besides, India has nearly 100 unicorns, with more than 15 percent added in the first quarter of 2022 itself.

The access to venture capital funding allowed many startups to grow manifold in valuations, scale their businesses, and expand their network. Moreover, the advent of e-commerce growth with the Direct-to-consumer (D2C) brands and such access to the enormous pile of funds hinted that India would reach the 5 trillion dollar economy goal much sooner than expected. 

But this funding spree paused with venture funds tightening the roll of Indian startups after dismal performances from several funded companies. 

What Lies Ahead Towards The End Of 2022?

The Indian startup story is facing tremendous headwinds as we approach the last few months of 2022. The mere fact of the non-sustainability and scalability of these startups is raising red flags in the eyes of venture capital firms. In addition, there have been layoffs, significant downsizing of operations, and suspension of operations for many firms, making venture capital investors uncomfortable with their investing view.

One of the primary reasons for the startups to raise funds is to sustain the initial few months of operations (in losses) until they reach a scale (volumes and revenue) where the unit economics start making financial sense in cash flows. Unfortunately, some of these startups did not scale as expected and ran out of cash. The only way to sustain them is to raise fresh capital or cut down on operating costs. The venture capital funds are afraid to invest more without clearly seeing a path to profitability.

How Are The Venture Capital Investors Reacting To This?

The access to venture capital funds is now strictly monitored and has almost dried up for new fundraising rounds. The global inflation scenario and the talks of the economy entering a recessionary phase have cautioned a lot of ventures, even in the primary capital markets. Furthermore, the turbulence in the secondary market and the wavering valuations of some of the stocks have spillover effects on the primary market, thereby tightening the funding rope for startups quite aggressively. Also, because of the inflation in the major global economies, the central government will be motivated to increase interest rates to control the inflation, thereby affecting the liquidity in the market. Hence, access to primary funds from venture capital will be a problem for the startups.

Large deals are getting impacted

The tightening has affected large fundraising rounds in the past two months of 2022, hinting at VC investors’ reluctance to shell out large payouts to the startup owners.

Per a Tracxn report, Indian Startups raised over $6 billion (where deal size was more than $100 million) in the first quarter of 2022, i.e. January to March 2022. But the same number for April 2022 and May 2022 dropped to less than $2.75 billion.

One VC said, “The large deals are getting stuck or delayed as investors are in no hurry to commit capital when there is no competition for deals“.

Investors want to be doubly sure before they put in any more money in the primary market. The last leg of funding for the private companies leaves substantial headroom for encouraging valuations and makes the most money for early-stage investors. That is precisely the problem.

The late-stage funding has become a problem creating a ripple effect on the entire ecosystem.

What it means for the startups

There are umpteen examples of these startups failing to scale to the expected level and, therefore, starting to feel the heat from their VC investors. All these changes mean the startups will have to change how they think about their business. 

Here are the implications for businesses:

  1. More profitability over scale of valuation
  2. The path to profitability must be clearly defined and well laid out
  3. Specific focus on costs
  4. Effective and efficient use of the fundraising
  5. M&A rounds will take longer to close 
  6. Large fundraising opportunities will be limited and may take much longer than usual

They either cut down their scale in operations, lay off employees to save costs, or shut the business arm altogether. For instance, Swiggy, with a $10 billion valuation, recently announced that they are planning to shut down the Swiggy Genie service and scale down their operations in Supr Daily as operational scalability has become a challenge. In addition, many well-funded startups like Cars24, Meesho, Blinkit, Unacademy, Vedantu, etc., have started seeing layoffs of their full-time employees. 

We have seen many companies who have now shifted gears and changed direction to profitability, focusing on preserving cash (as against the usual cash burn).

Lastly, all the well-funded startups eyeing an IPO route in the next 18-36 months will see significant changes in how they run their operations. If they want to continue thinking about public funds with the same timeline, they will have to cut costs and drive towards profitability sooner rather than later.

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