As Funds Dry Up In Startups, Many Founders Stare At Austerity Measures

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The glory days of Indian startups are on the wane as many founders prepare for a tougher ride down the fundraising route. This setback comes against the backdrop of a spectacular year in 2021 where the startup boom in India resulted in startups collectively raising close to USD 35 billion.

The effect of this trend is that either startups are seeing a dry-up in funds or facing corporate governance concerns, particularly in a market that is becoming uncertain day by day.

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Anand Lunia, the founding partner of the venture capital firm India Quotient, described the situation as being brutal. "We haven't seen a slowdown like this in at least five to six years. It is going to be brutal," he said.

"I expect to see a lot of zombie unicorns. Companies which became unicorns but have no business model have stopped hiring - they are not dying, but will become irrelevant," Lunia added. 

How Bad Is The Problem? 

That the problem has scaled up to unprecedented levels is evident from the fact that startups are laying off employees to slow down on cash burns. However, Reuters revealed that the issue is perhaps far more deep-rooted than what is visible on the surface.

The case of Meesho-, a fashion startup that quickly scaled up and became a unicorn, thanks to investors like SoftBank and Fidelity who pumped in millions of dollars into the business taking its valuation to USD 5 billion- is a good example. Unable to turn in the expected growth rates, Messho is now trying to raise debt and reduce cash burns after its efforts to bring in fresh funds were thwarted.

While it's not uncommon for startups to flounder, the cause of concern also arises from big investors facing serious setbacks.

For instance, SoftBank, a Japanese venture capital firm that has more than USD 14 billion in investments in the Indian tech sector, has reported a loss of USD 26.2 billion in Vision Investments - one of its investment arms. From the bottom to the top of the value chain, a sense of crisis looms large.

Caution & Scrutiny Above Everything

With the market becoming volatile and unstable, big investors have come up with a revamped policy to ensure returns from the startups. Many experts are suggesting that these are only the early signs of a bleak future that many Indian startups are set to face.

The result of this shifting trend is that contrary to the unprecedented growth expectations of Indian startups last year, the hopes have now dulled. Fundraising has stalled in most cases and when the possibility arises, the firms are subjected to serious scrutiny by the investors before the question of any investment even arises.

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Executives from eight venture capital groups expressed growing fears that the lack of funding will ultimately lower the valuation of startups, leading to job cuts and a low cash flow to achieve financial targets.

Already the signs are evident with companies like Vedantu, Meesho, Unacademy, and Better.com, among others, laying off staff and readjusting growth expectations. Others, such as BharatPe, are announcing revamps in governance practices.

The concerns are being further stoked by the notion that startups are already overvalued in India, and on top of that, when the business model is based so much on discounts and special offers, questions on revenue generation look bleak and foggy. 

Falling Share Prices: A Big Concern? 

According to data shared by Venture Intelligence, in more than a year April was the first month when there were no new Unicorns in India. What's worse is that the total funds raised by Indian startups stood at USD 5.8 billion in March-April, which is a dip of 15% from the same period last year.

The conflict between Russia and Ukraine has also not helped as rising interest rates have hit investors' sentiments everywhere. It has resulted in a significant devaluation of tech companies in the market.

For instance, the valuation of SoftBank-backed payments platform Paytm fell by 27% on the very first day it became an IPO. In the next few days, the share prices of Paytm further saw a cumulative fall of 62%.

Similarly, Zomato - a food delivery app, saw its share prices dip by 67% from its peak, while Nykaa- a fashion and beauty startup, saw its share fall by 43%.

The experts are suggesting that the days of luxury money are now over for Indian startups, and it will be difficult to get funding without a clear business model and revenue stream.

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