Has investment crunch arrived in Indian startup world?
The startup culture of India boomed very fast. Investors did not leave any opportunity to multiply their investments. Back to back infusions, over valuations, betting on multiple horses of the same race, everything was going so well. One entrepreneur was inspiring 100 others. And suddenly we started hearing news about few companies shutting down, few laying off their employees and so on. The recent happenings in the startup world has lead us ponder -has investment crunch arrived in Indian startup world?
Let us try to understand things in a systematic manner. What are startups- the keywords that could be attached to startups are scale, innovation, technology, growth and ambition. Borrowing the idea from the west and witnessing the success stories of many foreign firms like Amazon, Uber, Google, Facebook India also started following the league and no doubt some of them really did well. Now these successful companies started attracting big investments like Japan’s Tech giant SoftBank, China’s Alibaba, Sequoia Capital, US- based Tiger Global Management etc.
As a result, a huge number of deals started taking place at a much faster pace. Startups started raising funds at a much faster pace. The average gap between the two consecutive rounds of funding decreased to as less as 3 months (Tracxn). There are two reasons behind it:
- Just as speculation increases commodity prices in economics, in Startup world speculations are skyrocketing the Startups valuations. Not only this investment drying up hoopla, is making startups grab as big a pie of this scarce resource as they can. This money will not only speed up their growth story but also let their customer not have it.
- Secondly, investors also don’t want to have that notional loss of not funding a good startup. They are offering higher valuations to lure the startups.
The overall result is:
- Daily news of startups getting funded is encouraging many non-profitable businesses, hoping to thrive on investor’s money.
Profitability of a business is a self-check on it. Unprofitable businesses die a natural death. But with enormous funding examples available, startups are running a different model all together, which involves offering deep discounts to increase customer base. The focus of businesses has changed from making a profit to luring investors.
270 city focused companies, more than 45 online grocers, more than 80 food tech companies- each sector is flooded with players. Almost all of them are giving discounts and running operations on investor’s money.
This is an unstable form, which will settle down itself in the form of consolidations, mergers, the emergence of unicorns and others ceasing to exist.
- Since initial rounds of investments were made at an over valued figure, it becomes equally more difficult to make it to the follow-up round
According to Tracxn, out of 31 Food tech companies that received initial funding only 5 were able to make to the next round of investment. Funding. Since the company is overvalued in the first round itself, it becomes even more costly to buy company shares at next valuation. Hence, the deal is not that lucrative for investors at the later stage.
DAZO– order exclusive handcrafted food tech based out of Bangalore recently shut down its operations due to lack of funding. Dazo raised seed funding of an undisclosed amount from the founders of companies like Commonfloor, TaxiForSure, Redbus and others, but it could not manage to raise the follow-up round. Moreover, the incumbents copied their business model very easily and thus the company could not survive the battle.
HOUSING.COM –A year ago when housing.com raised $ 100 million from Soft Bank it was valued at $ 400 million and within a year the company has been devalued to $ 50 million since it has not been able to generate revenue nor attract the user base.
- It’s been enough of it for the investors playing too risky.
LANGHAR a Delhi- based home food delivery startup closed down because it could not create a market for itself. In an interview to ET, Sudhir Sethi and TC Meenakshisundaram (IDG Ventures India) hinted towards the startup bubble saying, “Me-too companies with weak teams and no differentiation will not get funded. The binary situation of will-not–get-funded is coming up very fast.” Similarly, ORDER SNACK, Chennai-based snack ordering firm shut down. Players not able to catch the investor’s eyeballs due to lack of differentiation are loosing the battle.
- Speculations are intensifying the competition.
In order to show volumes, one needs growth. Since there is a haste of getting investment earlier than competitor and valued more than competitors startups are hiring too many employees. Deepender Goyal (ZOMATO) in a blog mentioned, “If you have a startup that is doubling in size, hiring must be the most important part of your job.” Of course there are side effects of hire-fast policy and Goyal has cited attitude to be the biggest criterion of the people fired till then. The major side effects of such a hire- fast policy are:
- Over hiring or
- Hiring the wrong talent.
TINY OWL’S recently confirmed laying off more than 160 employees. The company calls it a move to increase productivity and efficiency by eliminating some of the strategic positions.
Zomato’s official blog mentioned in one of its old posts, wrong talent (specifically the attitude problem of employees) as the main reason for firing employees. The recent lay off, however, is because of the excess of manpower in one of its verticals, which is now redundant.
Local Banya laid off many of its employees and halted its operations for two weeks. Although the company is claiming the halt to be due technical up gradation of their site, it is hard to believe amidst all negative changes in the startup world in last few days.
Along with it Housing laying off 600 employees, Help chat laying off more than 100 in the name of shifting the focus companies might be hiding the holes in their pockets.
Too many things happening together sending negative signals to people. There is no doubt that investors have become a bit cautious of the valuations. There is no doubt that most of the startups are overvalued and this makes the follow up round even more difficult.
As put by Innerchef CEO in an interview to ET, “Startups live in a Darwinian world. …It will see the emergence of a number of unicorns (Startups with valuation of at least $1 billion). But that would come only for those who survive the valley of death.”
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