Experts, however, feel that startups with sound business models are still getting funds although a gloom exists in the market
When P2P money transfer startup Chillr raised US$6 million from Sequoia Capital in October last year, the investment was at its peak in India. Then, they got the green signal to spend the cash over the next 12-18 months so that they could go to market to raise follow-on funding soon.
However, as Chillr was getting ready with its investment plans, a pall of gloom descended in the market, shattering their calculations. They were luck that they were able to pick the distress signals early on and change tactics accordingly.
But not all startups were lucky like Chillr. As the funding slowed down, startups which had raised millions in VC funding, began to run haywire. Some companies had to shut down while some had to resort to restructuring and mass firing to stay afloat.
As is evident from the news of shut-downs emerging each day, there is no sign of an abatement yet. Stories of shut-downs and lay-offs are emerging each day. And no investors or startups have any idea when the market will come back to normal.
Not a crunch, but a course correction
“There are two different things happening here, though somewhat related,” says K Ganesh, a serial entrepreneur and Partner of Growthstory.in. “There is a funding crunch and availability of capital for the Indian startup ecosystem at the same time. Series B and C have gone down. This is due to the withdrawal or slowing down of hedge funds and the new players who came to India aggressively with large cheques, high valuation and bold bets.”
The flow of large funding was there in later half of 2014 and beginning of 2015, says Ganesh who is also Chairman of Portea Medical. “But when that went away, things went back to normal and sudden bump-up disappeared.
This also resulted in even Series A becoming more selective as Series A investors were concerned whether the companies will be able to raise Series B. Also, they were busy sorting out their earlier investments, supporting existing portfolio companies and getting them to Series B. They were distracted and busy with existing issues and did not have the bandwidth or appetite for new fresh investments though many of them had raised lot of funds.”
He adds that the market has started becoming more sane and more realistic. People started focussing on core metrics than vanity metrics. Instead of GMV, net revenue, monetisation metrics, profitability and path to profitability, sustainable growth – all came under focus and became the new mantra.
“So business models that were earlier getting funded, riding high on the basis of different metrics, getting funded and being valued high came under a lot of pressure and are struggling to raise further rounds to survive. These are either pivoting completely or restructuring or getting acquired for almost no value,” he explained.
Rajat Tandon, Vice President at Indian software companies’ body Nasscom, echoes Ganesh’s views, saying VCs have become more selective these days.
“The Indian startup funding scenario is quite impulsive. With the emergence of foodtech startups, hyper local and aggregators, in addition to e-commerce platforms, last two years of Indian startup ecosystem saw huge monies being pumped. However, 2016 has had a mellowed beginning. But I don’t think funding is drying up, instead the investors are becoming selective. They are doing deeper diligence and are looking at the fundamental financial metrics more closely,” he observes.
According to Vikram Upadhyaya, Founder of GHV Accelerator, the slow down, if any, is because of the over hyped GMV models and unrealistic unit economics. “Startups with the right team, quick pivoting and good tech background around the product are still up and running well. Aggressive funding is always short lived,” he feels.
Prajakt Raut, Founder or Applyify (an online investor pitch deck and assessment report platform for startups), also believes there is no crunch as such. “If you have a fundamentally strong business, led by a strong and committed team, there is capital available.”
Is consumer Internet the most affected?
Since the beginning of 2016, the market saw many casualties in the startup scene. While hyper-local delivery startup PepperTap, which raised US$50 million, shut down, SoftBank-backed Grofers substantially scaled down operations and laid off staff. Many other companies also took the drastic steps of laying off people or shutting down.
Ganesh believes that it was not just one single sector that was affected. “I don’t think this is affecting just a few sectors; it is affecting wherever the core model did not converge. But since lots of money went into consumer Internet sectors in the boom time, it appears that they are the worst affected.”
Earlier, because of scalability, it was easy to open in 20 cities and delivery businesses got huge funding. But when realism set in, they realised that it was untenable. Then companies and investor started running after the “last man standing” approach whereby by funding huge amounts, they were hoping that their company will be the only one left. “But that is a risky strategy and you need to have infinite capital to follow through and the conviction to sustain it,” Ganesh further adds.
Sanjay Bansal, an investment banking veteran and member of Indian Angel Network, also believes that faulty business practices resulted in many casualties. “Because of faulty business practices that were not attuned to scale with profitability, the unit economics were completely warped. No entity was able to crack this critical component. They thrived on giving discounts, while there were no real or significant differentiators of either service or product. This is especially true for the food tech startups.”
Does this mean India is maturing?
“Yes absolutely,” says angel investor Ashish Jhalani. “But it may simply be a consolidation as part of the growth phase. We will have to see what happens as a result to the ecosystem. If ecosystem remains strong and “real” businesses are being built, then yes it is maturing.”
GSF Accelerator Founder Rajesh Sawhney cannot agree more. “There is maturation process taking place across different investment stages: angels, seed, venture, and growth. The biggest challenge in India has been exits for investors through IPOs. We haven’t had enough IPOs, though M&A activity is clearly on the rise,” he explains.
However, Ganesh begs to differ. In his view, it is just a bust cycle. “It only means that this is normal boom and bust cycle that we have seen many times playing again and again. This was not the first and will not be the last. Smart entrepreneurs need to recognise that and change their strategy accordingly. They need to know when to play offence and when to play defence in a game, based on the situation. You can win in every situation as the game is not stopping and life goes on,” he elaborates.
In view of Upadhayaya, the part of the Indian startup ecosystem that is visible to the world is just the tip of an iceberg. “It is way bigger than even China. India started late and learnt from all the mistakes of the matured ecosystems globally. It is the biggest democracy that gives freedom to innovate at each level.”
How long will this gloom last?
Jhalani believes that the current gloom may even last for up to 12 months, although he is not very sure about it. “Ideas and ventures are still getting funded but maybe not as often. We are still seeing large enough deals happening. The only thing that has changed is that funders are looking at bottom-line numbers and projections closely. If the consolidation happens fast enough we may see the crunch go for the next six-nine months. My personal thought is that it may last 12 months or so, as the market will need time to adjust to a new way of thinking.”
Tandon also believes that it is time to focus on unit economics and acquiring real customers, rather than attracting them through deep discounts which has resulted in cash burn. With the ecosystem maturing, e-commerce firms are now concentrating on becoming profitable rather than merely growing. Whereas in B2B business, the growth and funding has been far steadier and such spikes have not been witnessed.
In Sawhney’s view, companies that will survive 2016 will inevitably emerge stronger in 2017 and beyond. Most good startups are already focusing on unit economics and profitable growth, unlike the previous years where the focus was on GMV and downloads, he adds.
How to survive the gloom?
“The strategies are very simple,” says Ganesh. “Firstly, ensure you have 18 to 24 months runway. The first goal is to ensure sustenance of the business. Secondly, if you have been fortunate to raise capital during the boom period, lock it up, throw away the key and work on core metrics and building a real business.”
Now, if you did not raise money during the boom time, you need to go back to the drawing board, look at business model that will be able to raise capital, settle for lower valuation, lower fund raise but get on with the business. Benchmarking the funding and valuations to previous rounds or other companies is unproductive.
“If you are starting afresh, focus on sustainable business as others are unlikely to get any funding in the near term. Focus on revenue, monetisation, path to profitability and genuine business metrics. There are enough series A, seed, pre-Series A funding available for these models. But the bar is higher and will take more time to close,” Ganesh concludes.
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