Start-up slowdown

Raising funds is becoming difficult

Around last year this time, unicorns (essentially tech-focused start-ups with a valuation of $1 billion or more) were popping up at a fast clip in India. The rush to list on stock exchanges was also unprecedented in the start-up universe till early this year. Raising fresh rounds of funds from marquee international investors was never easier for internet entrepreneurs. However, things have changed dramatically over the past few months and it is worth evaluating if start-ups can be the engine of growth in India as many believed. Since a majority of the start-ups depends on venture capital money, international disruptions and vagaries have a direct impact on the ecosystem. This was also true in the case of the dotcom bust at the turn of this century and during the financial crisis of 2008. While the overall commentary suggests that the current upheaval as a result of the crash in US tech stocks, increasing interest rates, China crisis, and Russia-Ukraine war may not be as bad as the dotcom debacle of 2001, uncertainty has increased significantly for start-ups.

Pink slips at top start-up companies cutting across segments — food delivery to edtech to fintech — are in the headlines ever so often as opposed to fund-raising at soaring valuations and an ever-growing list of unicorns in the past. Investments getting stuck, deals falling through, listings getting pushed back, hundreds and thousands getting laid off, and boardroom worries at venture capital firms are among the new realities in a world which has for long treated profitability with disdain and cautious spending with indifference. Global evidence shows that companies which are self-sustaining and lean, and have a healthy balance sheet stand a better chance of weathering the current turmoil. Start-ups in India must follow that example.

Long years of losses, as has been the trend, will not work any more. Start-ups will of course continue to raise funds from investors with deep pockets because that’s the route taken by thousands of them to convert a kind of cottage industry into a powerful internet-led economy centred around Silicon Valley. The journey will have to take a different course with a keen focus on balance sheets if start-ups have to become the engine of growth. It is thus important for start-ups to build reserves and become self-sustaining like some of their European counterparts who may not have to depend on the shaken up American venture capital ecosystem. Nurturing local investors to help Indian start-ups grow would be a good option too.

The latest numbers from the Tracxn Geo Quarterly Report showed that Indian start-ups raised $6.9 billion during April to June 2022, down 33 per cent from the $10.3 billion raised in the previous quarter. The fundraising also declined on a year-on-year basis. These numbers are making it look like a funding winter has set in, reflecting a severe downturn in investor confidence towards start-ups due to economic volatility based on macroeconomic conditions and the geopolitical situation. Everything from commodity prices, to inflation, and higher interest rates is affecting the ecosystem. While the funding winter may continue for some time, analysts believe that investors would bet on start-ups with long-term prospects. This should put innovation at the core of any start-up business to bring value to the table rather than making higher valuation an end in itself.