Top 5 Bad News for Startups in 2015
2015 was a remarkable year for the startups in India. A lot many good things happened which prompted the youth to plunge into the ocean of massive opportunities coupled with a supportive ecosystem.
The number of startups that came up in 2015 was more than twice, in 2014, an increase of 125% in funding over last year (from $2.2 bn to $ 4.9 bn). If we dig into deeper details of funding, 2015 was the year where as many as close to 400 startups got funding (wings to fly) as against 180 last year. Most of the funding growth over last year took place at the seed stage, which means investors were risk takers (seed stage investment grew 6 times over last year) and giving an opportunity to companies to show potential.
The above figures are not the end of the story- ‘picture abhi baki hai mere dost’ and here comes a trail of happenings that shook the rosy picture of startup ecosystems.
1- Startup Crunch: (Read: Has Investment Crunch arrived n Indian Startup World) seed stage funding has increased to 622 over 340 in 2014, but VC funding has seen a slower growth of 132 over 71 in 2014. This means that startups that have been given a chance to prove potential have not been successful enough to lure investor’s money for the next round and hence a choke point. Less than 25% of the angel-funded startups are able to raise series-A funding. (Read: 7 Implications of Investment Crunch in Startups)
According to Tracxn, out of 31 Food tech companies that received an initial funding only 5 were able to make to the next round of investment. Since the companies are overvalued in the first round itself, valuations become unviable at next round of funding. Hence, the deal is not that lucrative for investors in the next round.
Many of the investors have tightened their purses and FOMO (Fear Of Missing Out) is increasingly losing its spell resulting in investors playing cautiously. Tiger Global the third biggest investor of Indian startups after Sequoia and Accel recently raised $2.5 billion but does not have Indian Startups on its list of investments.
2- Shut Downs: 90% of the startups fail at some stage or the other. Thus, there are more failure stories than success. Though I have not come across a complete list of startups that shut down its operation (because it is hard to, failure take place in silence while success blows its own trumpet) but some of the famous ones being:
Online Grocery Delivery- Local Banya laid off many of its employees and halted its operations. Although the company is claiming that the halt is due technical up gradation of their site,it is not operational since October 2015.
In Food Tech- we have Dazo,- backed by most creditworthy investors (The Google India MD, Amazon India Country Manager, CEO- Freecharge and Taxiforsure) changed its business model from internet kitchen to restaurant aggregators that made it dependent on third parties and it lost its conformity.
Others are Langhar, Order snack, Eatlo.
Online Marketplaces- Watchkart, Jwelskart, Bagskart, DoneByNone
Logistics- Townrush, Deliverwithme
3- Layoffs- So many companies adopting mass layoffs (Read: Reasons Behind Hiring and Firing) that too in an unprofessional way, put all the startups in a bad light. It had always been a comparison of chasing your dreams against being a slave when it comes to choosing between startups and corporate, but it is no more. Against positives- interest, challenge, growth and learning, people have started attaching uncertainty, immaturity and risk with these startups (Read: 6 Points to Consider Before Joining a startup). More than 3,270 employees were fired in the last 6 months by 20 companies out of which 40% were from Food tech. Yes, you are right Tiny Owl was the biggest newsmaker and point of attraction in this drama where founders were even made hostage for two days it laid off more than 160 employees before Diwali. The company calls it a move to increase productivity and efficiency by eliminating some of the strategic positions but employees were furious about it, as the timing, as well as the unprofessional approach towards the problem, had made it worse.
Along with it Housing laying off 600 employees, Help chat laying off more than 100 and Zomato 300, in the name of shifting the focus companies might be hiding the holes in their pockets. GrabHouse fired 170 employees citing restructuring the reason.
Ideally in Indian culture, layoffs are not acceptable as there is no state security like other developed countries. Thus, it becomes a moral responsibility of the companies to either absorb them, or help them develop skills or change their role, or, at least, help them find other option so that they can support their family.
Talent is a critical resource for any tech startup and I believe the biggies have already acknowledged this fact and they are trying to attract talent by giving all kind of amenities and fancy packages. Although, some startups have already cited the difficulty in attracting skilled talent and in the back drop of such layoffs it will only become more challenging for the startups to hire the coveted talent in the market.
4-Consolidations – The number of consolidations increased from 55 in 2014 to 120+ in 2015 (Tracxn)
Three reasons of consolidation:
- Growth– Perfect example was Snapdeal acquiring Freecharge for $ 400 million- the biggest startup deal in 2015. Snapdeal soon launched its digital wallet in association with Yes Bank to give its competitors- Flipkart and Paytm a tough Fight.
- To sustain themselves– Many startups are dying fast due to high cash burning model combined with drying funding. The recent acquisition of Zo Rooms by Oyo (Read: Challenges in Room Aggregation Business in India) was a similar example as that of Ola acquiring TaxiforSure. Both Zo and TaxiForSure are reported to have burnt the cash raised in previous rounds and could not arrange for further investment thus getting acquired could not provide a softer landing to the otherwise sinking ships.
- Investor’s Interest- More than startups it is the investors who are concerned about their money and in order to make up example- Quicker acquiring CommonFloor where TigerGlobal is the common investor. Private equities have to show these fancy returns to their investors for raising another big round of funds for further investmenst.
Grofers aqui-hired Spoonjoy (Food Delivery company) and Townrush (B2B Logistics company), the two segments in which it was not able to expand. Snapdeal has made 10 acquisitions so far, Zomato 9, and Flipkart 5. Bigger companies are regularly eating up the smaller ones.
5- Devaluations– Square, Snapchat, and Dropbox are the global examples that are too facing the hard times. Housing.com, which was valued at $400 milllion and raised $100 million from Soft Bank, was being approached by an undisclosed startup at devalued valuation of $ 50 million (Reported Busines World) after which the initial investor (SoftBank) came to its rescue. Canvera, the online photography startup, had to settle for a threefold decrease in its value from Rs 2,50 crore to Rs 75 crore in the last week of December. Throughout the year funding was celebrated as a psuedo to success but the trend may halt with the coming up of this news.