Wednesday, Jul 06, 2022
Outlook.com
Outlook Business

Is The Great Indian Startup Funding Party Coming To An End?

Hammered markets, increased interest rates by the Fed, unabated war – reasons enough to develop cracks in the funding ecosystem for startups

undefined

44 startups turned unicorn in 12 months of 2021 while 15 have attained this coveted status in the first three months of 2022. Many would believe that the momentum continues. But deeper analysis paints a different picture.

Sample this: Ride-hailing app Ola, which was planning to get listed on the bourses this year, is now planning to raise a new round of funding at a lower valuation. This will likely be the first down round of a large Indian unicorn after the boom last year.

That’s not it. Byju Raveendran, founder and chief executive of edtech giant Byju’s, has taken a loan to invest $400 million into his company. The startup recently announced that it has raised $800 million in a new financing round, half of which it said was bankrolled by Raveendran. Expectedly, the news created a market buzz as it’s unlikely to see a founder invest in a company that is about to file for an IPO.

Even IPO-bound Oyo Hotels & Homes is planning to reduce the size of its IPO by almost 50% from the initial $1 billion in view of adverse secondary market conditions and a crash in stock prices of tech startups. It may also need to refile the draft red herring prospectus (DRHP) with the Securities and Exchanges Board of India (Sebi).

These happenings in the Indian startup ecosystem suggest not all may be well in the months to come. We may after all, in the scorching months, be actually looking at a long winter ahead for Indian startups.

Dying Euphoria

After a funding frenzy that led to 44 startups becoming unicorns in 2021, a record $42 billion being pumped into the ecosystem (according to a Orios Venture Partners report), and many others to grow their valuation multi-fold in the year, the question people are asking is whether the euphoria is now slowing down. Adding to the slowing pace are global tensions triggered by Russia’s war on Ukraine, rising oil prices, and the Fed’s decision to raise interest rates for the first time since 2018 in an attempt to bring fast-rising prices under control.

According to an analysis by Crunchbase, Global venture funding in February 2022 fell by $10 billion month over month, clocking in at $52 billion, based on an analysis of Crunchbase data, with startup investors seem to be coming off last year’s highs and assessing the impact of the Ukrainian conflict, record inflation and public-market turmoil. It also found that seed-stage funding grew slightly month over month, while early-stage funding fell 17 percent, and late-stage funding dropped 19 percent.  

Experts believe that the problem is impacting the world at large and not just the Indian ecosystem alone. While about six-seven months ago there was euphoria across the world – inflation was low, bitcoin and crypto were at an all-time high, and there was a SPACs (special purpose acquisition companies) boom in the US, since November things have been on a downslide. In India, too, the Zomato IPO had people going in a frenzy but the buzz soon faded with the IPO not doing that well followed by the Paytm disaster. In 2022, Zomato, Nykaa, CarTrade, Policybazaar and several others have witnessed a 40-60 percent dip in their stock prices while Paytm is currently trading at one-fourth of its issue price.

Things to Ponder

Was the Zomato-Paytm debacle a trigger for the current lull? Kunal Chowdhry, Global investor and CEO, Apollo Singapore Investments believes it’s a mix of several factors and also affirms that the slowdown is here to stay. “Inflation is a big factor because it impacts every segment of the economy forcing banks to clamp down hard. If borrowing becomes expensive then it becomes difficult to fund your company through anything other than equity. Plus, with the Fed turning off its tap, it means that the amount of easier money coming into the ecosystem is dropping precipitously. The stock prices of the Softbanks and the big tech companies of the world are being hammered as well. All of this means that the big VCs and investors have to do a lot more due diligence of the companies they want to invest in and be more cautious in terms of their ticket sizes.”

Chowdhry cautions that next year onwards things would probably become more difficult. “People forget one thing: the Covid bills have to be paid. Governments have doled out money left, right and centre in the past two years – they are all running deficits. Who is going to pay for all that? All the LPs and VC funds, all the rich angel investors -- you can’t expect poor people to pay for it. And, when it happens, they (the investors) may suddenly have $100 million less than they already have – that’s a $100 million less for the VC fund and that much less for the Indian startup ecosystem,” he argues.

Cautious Play

Even if experts shy away from admitting that funding may hit a downturn over the coming months, it’s apparent that investors are taking cautious steps. They worry volatility and its impact on the company they may invest in, which is why they are increasingly focusing on the economics of a company and asking tougher questions to founders. That’s also because the VCs themselves will come under a lot of pressure from their LPs (Limited partners). The explosion of valuation of startups that was seen in the past two years may also see a correction.

“Many of the startups have been valued much higher than they would have been conventionally. But beyond a point that wasn’t sustainable; we are seeing a course correction there more than the funding going away,” said Ashish Fafadia, Partner, Blume Ventures. He added that valuation of companies will prune down as will the subsequent round sizes. “While the India story is intact with many investors deeply invested in the ecosystem, investors will certainly be more cautious and ask tougher questions to founders about the economics, etc. and they will be more conservative in looking at a company from here on.”

All of this will also impact exits via public listings for VCs/investors with several IPO-bound companies going into a wait-and-watch mode. Delhivery, Pharmeasy and Oyo – all have deferred their IPO plans in the recent future even though Delhivery and Pharmeasy both have SEBI nods to go ahead with their listing.

Keeping Hope

Some like Anand Daniel, Partner, Accel is hopeful that things won’t be that bad for Indian startups. “I believe there will be a bit of a slowdown mainly because globally, the public markets have corrected quite a bit and also because of the current geopolitical situation. Having said that, the enthusiasm for the India market still remains and it is fundamentally very strong.”

A good, innovative company will continue to get funding, experts believe. “The one which has lost its strategy, lost control of its cash burn and is spending Rs 25 to earn a rupee of revenue – such models will suffer in the next 6-12 months,” said Chowdhary.

Advertisement
Advertisement
Advertisement