“Htoo long Is your runway pre-flight? ” This is what venture capitalists (venture capitals) Start meeting in India these days, says Ananth Narayanan, founder of Mensa, one of the country’s newest unicorns (companies with a market cap of over $1 billion). Until recently, the main issue that mattered to Indian startups was valuation. But the mood has changed.Share prices of listed companies plummeted venture capital Companies are more cautious about investing. Emphasis on unrealistic valuations has given way to concerns about how quickly start-ups can start making money. Mensa, which bought stakes in digital brands, is one of the few profitable companies so far.
A lot of the rest don’t. Since the beginning of 2021, the number of unicorns created in India has increased from 40 to 108. Only the US and China produce more. In 2021, promising startups will easily find investors eager to fund fast-growing companies with great ideas. That year, investment in start-ups tripled to $35 billion. The momentum continues in 2022, with $3.7 billion invested in March alone. That’s the clamor for startups to opt for “founder-friendly” investors who care less about oversight, the drudgery of background checks, and other intrusive oversight.
The environment has since cooled down. Investment in December was just $900 million. One reason is the poor performance of companies going public in 2021: Zomato (food delivery), Freshworks (enterprise software), Paytm (payments), Policy Bazaar (insurance) and Nykaa (fashion). Shares of each company fell more than 59%. While the plunge in global tech valuations coincided with a broader sell-off, that was not the case in India. The Sensex, an index of the country’s 30 largest companies, is near an all-time high and the economy is growing at a respectable pace.
The poor performance means other planned listings, such as that of online pharmacy PharmEasy, will not go ahead for now. Acquisitions have also been hit hard. In October, the $4.7 billion acquisition of BillDesk by PayU, two profitable payments companies, was called off. PayU owner Prosus, a local venture capital The company, which is owned by Dutch-South African firm Naspers, is widely believed to have departed as the fall in Paytm’s share price created a new, lower benchmark for the payments company’s value.
Revaluation of startups is now the top concern of all Indians venture capital company. Funding depends on the time required to assess reserves, costs and profitability. In theory, such information is available to all Indian companies, as they are required to file public financial statements. But the system is not working well. Of the 40 startups that have submitted results for 2022, only three are profitable, and only five have enough cash to last more than six months, based on their annual payouts, according to statistics service Tracxn (see chart). .
Costs are being cut in response to a tougher environment. Inc42, an online publication that tracks startups, has cut 20,500 jobs over the past year, which could herald a bigger wave. Edtech was hit particularly hard, with 16 companies laying off more than 8,000 workers, with the largest cut being India’s most valuable startup, Byju, which shed 2,500 workers. The post-lockdown return to classrooms and the low barriers to entry for creating educational material online have raised doubts about the future of the industry as a whole.
Byju has other problems. It was accused in July of using inappropriately aggressive accounting and sales policies, which it denies. Other startups have also come under fire. The founders of BharatPe (payments), Trell (social media) and Zilingo (supply chain management) resigned last year amid fraud allegations. Both BharatPe’s founder and Trell have denied the allegations; Zilingo is investigating the claims. January 18 Amit Bhasin, co-founder of auto repair company GoMechanic, admitted that after cutting 70% of his workforce, “we are chasing growth at all costs, especially when it comes to financial reporting, which we deeply regret”.
The ordeals call into question the role of supporters. Is the company adequately supervised? Are the valuations credible? Well-known Silicon Valley firm Sequoia Capital has invested in GoMechanic, BahratPe, Trell, Zilingo and several edtech companies. It acknowledged governance issues with various holdings in April and vowed to provide stricter oversight, but declined to comment further.other foreign countries venture capital Companies are also rethinking how they deal with India. A more diligent approach may be required.
The way companies go public will also change due to losses from public offerings. India’s stock market regulator made changes in September to step up scrutiny. It will force companies to provide information on the price of private deals that occurred before going public, as well as key figures used to arrive at valuations. Large investors will also be required to own at least half of the shares for at least one accounting period, preventing them from selling shares during the post-offer hype.
These changes may not have prevented the coming carnage. Anand Lunia of India Quotient, a venture capital A Bengaluru-based company believes that between a quarter and half of today’s unicorns will become zombie companies, existing in name but no longer funded or operating. His willingness to speak publicly is unusual. His point is not. Yet despite concerns about the near-term future, neither Mr Lunia nor many others who see a major currency debasement on the horizon are pessimistic about the long-term prospects for startups. With strong economic growth, India excels at producing entrepreneurial software engineers whose skills are increasingly being applied across industries. All of this suggests that the economy will eventually return to growth after the impending storm passes.■
To stay on top of the most important news in business and technology, subscribe to The Bottom Line, our weekly newsletter for subscribers.