The Fall of Indian Startups
In the Economic Survey 2021–22 released in January 2022, India was named the third-largest startup ecosystem in the world, after the US and China. A Nasscom report said the number of start-ups has been growing steadily with ten percent being added every year. Earlier, Prime Minister Narendra Modi said India has emerged as the second-largest startup hub in the world. Also, India has around 75,000 startups and 7.46 lakh jobs have been created by the Indian startup ecosystem.
Despite having the world’s third-largest startup environment, 80–90 percent of Indian firms fail during the first five years of existence. Startups have received a lot of attention in recent years all across the world, including in India. As the number of companies grows, more support from various sources has been accessible.
While stats makes one feel that it is a great achievement, ground realities seem to be different. Indian startups are taking a hit in valuation. Paytm Mall, which lost its Unicorn status in 2022, is a good case in point. Other cases include the fall of India’s biggest tech investor, SoftBank’ Vision Fund has reported a record loss of USD 26.2 billion. In the last few months, more than 5,000 employees have been laid off from ‘promising’ startups specially ed-tech like Vedantu, Unacademy, Byju’s, Meesho, etc.
With funding starting to dry up due to global macro-economic factors, the startup ecosystem in India is bracing itself for a “long and bitter winter” and potential mass lay-offs in the next 12–18 months, particularly in sectors such as ed-tech and gaming that got a significant push during the pandemic, according to experts.
Investors, founders, and CEOs have started sounding bulges on an impending funding crisis for start-ups and are taking a somber tone on the medium-term outlook of the ecosystem. After raising a record $35 billion in 2021, Indian start-ups are staring at falling valuations and a slowdown in funding as investor sentiment turns negative after more than a decade of bull-run that saw India mint 100 unicorns.
The Indian startup environment has changed dramatically during the previous two decades. Bangalore has emerged as India’s principal startup hub, but substantial activity has lately been seen in Mumbai, the National Capital Region (NCR), and a few smaller locations. As a result of all of these activities and possibilities, India now has the world’s third-largest startup ecosystem.
Despite having the world’s third-largest economy, India is still the world’s worst startup ecosystem. Ninety percent of Indian startups fail during the first five years, according to statistics. In 2019, the number of startups declined by 35% from the previous year to 5,462. Regarding the Startup ecosystem, India has reduced from 17th place in 2019 to 23rd place in 2020 out of 100 nations. However, the drop is not unexpected; this trend has been ongoing since 2016. While the government’s StartUp India project generated a lot of buzzes, it failed to improve the health and feelings of the Indian startup ecosystem.
Some reasons for the decline of startups:
- Lack of Creativity
- Copying of Global Corporations and Multinational Companies
- Duplication of western technology
- Investors have burned their hands a number of times in recent years, and they are increasingly wary, making funding more difficult. As a result, the dream of being an entrepreneur is fading among Indian youth.
- Lack of concentration
- Not suitable products for Indian Markets
- Customer Ignorance
There has been an avid decrease in unicorn creation. The decline in funding in April 2022 is major because of the decline in large funding rounds. VerSe Innovation — the parent company of Dailyhunt and Josh — raised the biggest funding round last month when it bagged $805 million at a valuation of $5 billion. This represented nearly half of the capital raised by Indian startups in April. While Dailyhunt has been able to increase its valuation amid this funding slump, not all have been able to do so.
How to stop the start-up slump?
While the incoming recession may not be a cataclysmic event like the global financial crisis of 2008, there still looms a possibility of a prolonged economic slump and significantly higher interest rates. For tech startups to get back on track, the IPO market, which currently is trying to wait out the volatility, needs to make a comeback. After the recent decline in the shares of listed startups, the wait for market sentiment to improve or to reduce the offered size has become the actual concern.
Recognizing the opportunities that are brought to light in times of crisis. If you look at historically successful startups, such as Uber, Airbnb, and WhatsApp, you will find that periods of crisis are not only a challenge but can also open up new avenues for entrepreneurship.
Having a clear picture of your financial standing by assessing fixed and variable expenses and actual revenue is the need of the hour. Be mindful of short-term challenges and focus on the crucial essentials needed for survival.
If the pandemic has shown CEOs and CFOs one thing, it was to free up cash as well as resources that would keep the doors open. Even when it comes to a recession, cash liquidity is imperative for keeping operations going. So, enable best practices for prudent cash and liquidity.
Create a narrative of change that highlights your company’s capability of developing new markets. It might mean challenging your business models to get a piece of the market share. This will help you showcase the value creation of your business to potential investors.
As unpopular as the opinion may be, founders today need to accept that the valuation metrics are going to continue changing, and the comps from even a couple of months ago, no longer hold validity. Scrutinizing expenses and the basics of entrepreneurial wisdom like lean startups, remaining profitable, etc. will start to hold true again.
After all, startups are not just about driving change, they must also successfully respond to change. Looking at the global financial scenario today, startups need to be prepared for bouts of economic turbulence, in order to last.
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