India’s economy zooms ahead, but startups stuck in a limbo

India’s economy is booming, but its startup ecosystem has been hit by turbulence.

While thenumber of startups across the country are expanding rapidly, only two reached unicorn status in 2023. A unicorn typically refers to a privately held startup company that has reached a valuation of over $1 billion.

Up until March 2024, no new unicorn startups have emerged, contrasting sharply with the 14 startups that attained unicorn status during the same period in 2022.

The slowdown in unicorn additions reflects a funding crunch attributed to the global funding winter. This funding winter for startups started in early 2023, affecting India as well.

Funding woes

Global investors, who were once bullish on Indian new-age tech startups, have become cautious. While the global economic slowdown is one factor behind their decision, recent losses experienced by several Indian startups have also played a major role.

Karthik Reddy, managing partner at Blume Ventures, a major investor in early-stage startups, told news agency Reuters that there has been a shift in the company’s investment strategy. Instead of spreading funds across numerous startups, they now opt for fewer deals with larger sums, driven by the necessity to secure gains in an uncertain market.

“When your existing portfolio is not showing gains, it is hard to be excited to do more,” Reddy said.

The investment landscape has evolved, with investors now focusing on potential profitability.

This change is reflected in the numbers, with India’s startups raising only about $900 million in the initial months of 2024, signaling another subdued year following a massive drop in funding in 2023.

Data from Venture Intelligence showed that startups raised $8 billion in 2023, hitting a six-year low. The lacklustre funding in the previous year led to the shutdown of 35,000 startups in the country, according to a report by Bain & Company in collaboration with the Indian Venture and Alternate Capital Association (IVCA).

The amount raised in funding is low in comparison to the record $36 billion achieved in 2021, or even the $24 billion in 2022.

In contrast, India’s stock market has surged by 19% since the beginning of the previous year, hitting an all-time high this month, fuelled by economic growth exceeding 8%.

Data from CBInsights reveals that the drop in funding for Indian startups last year, by two-thirds, was notably sharper than the 36% decrease observed for US startups and the 42% decline for startups in China.

How it impacts economic growth

The decline in startup funding poses broader economic implications.

Startups have been huge contributors to India’s job market and economic growth, generating 20-25% of new jobs and 10-15% of economic expansion in the past eight years, according to a report by an Indian trade body and McKinsey.

Over the past few years, several major startups have laid off thousands of employees. Some startups that announced lay-offs were considered the biggest names in their particular sectors. Some of these new-age companies include big names like Byju’s, Ola Cabs, Paytm and Zomato.

Such decisions not only impact the employees but also have a broader implication on overall economic growth. These decisions also take a major hit on investor sentiments, leading to a lack of future investments.

Overvalued startups

It may be noted that Paytm’s stock has gone down by 80 per cent since its 2021 listing, while Byju, once valued at $22 billion, now struggles with a valuation around $200 million, while also struggling to meet staff payments. It recently vacated all office spaces barring its headquarters in Bengaluru.

The edtech company is also embroiled in a tussle with its investors over a rights issue.

Ola saw its valuation being reduced despite not facing any crisis. Vanguard, an investor in Ola Cabs, reduced the firm’s valuation to $1.9 billion, marking a 74% decrease from 2021.

Ashish Sharma, the CEO of InnoVen Capital, which is backed by Temasek and has invested $1.5 billion in Asian startups, told Reuters that it is evident that certain sectors received excessive capital, resulting in a valuation spike.

“Some companies got lucky … (but) getting lucky cannot be a business model. One change is that we need to be more cautious when evaluating high growth/ high (cash) burn businesses and assess if the assessable market is large enough that it can attract growth investors to raise the next round of capital,” Sharma said.

However, luck seems to be running out. Venture capital firms like Nexus Venture Partners are now diversifying their portfolios beyond tech startups. This approach aims to capture a larger share of the economy while mitigating risks associated with traditional and new-age economy sectors.

“Most (Indian) startups were too richly valued and SoftBank could not justify those valuations,” said a source quoted in the Reuters report.

What’s next for Indian startups?

The situation could change for Indian startups this year, with Japan’s SoftBank considering a potential investment of up to $300 million in India this year. If it does invest, it would lead to a potential revival of investor interest in Indian startups.

Rajan Anandan, Managing Partner of Peak XV Partners, formerly Sequoia India, hinted at a turnaround in funding while speaking during the Startup Mahakumbh summit in New Delhi.

He hinted at a potential turnaround from the funding winter, projecting that Indian startups could secure approximately $8-12 billion in funding this year. Anandan suggested that around $10 billion, approximately Rs 80,000 crore, could adequately fuel the expansion of Indian startups.

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