The COVID-19 pandemic was a globally destabilising event. But not so much for India's startup ecosystem. Lockdowns, the fear of social interaction, extra time to work on passion projects, and a score of other reasons worked in tandem to shake awake that dormant entrepreneurial spirit in hordes of Indians.
As of September 2022, India has over 78,000 registered startups -- up from just 11,700 startups in 2019. In this world’s third largest startup ecosystem, 107 startups enjoy Unicorn status – meaning they are valued at over $1 bn each. Together, these are valued at $341 bn. Born in 2021, 44 of these Unicorns enjoy a collective valuation of $93 bn; 21 others have achieved Unicorn status in the last 10 months, cumulatively valued at $27 bn. Four Decacorns have also been born, each valued at over $10 bn. The pace of growth has been nothing short of explosive, and there may lie the problem.
The boom is somewhat reminiscent of what played out in the early 1990s. When dot-coms first appeared on the scene, they had quite a few things going for them. First was the mass adoption of new technology: the computer. These machines were finding space in almost every household and office. In today's world, the smartphone has a similar story: most people own at least one, and many more are on their way to getting one.
Access to the internet has also increased exponentially in India; the Supreme Court in January 2020 declared access to the internet a fundamental right. A sharp fall in data prices over the last few years has augmented this increase in penetration and improved access. Coincidentally, improved and cheaper access to the internet was also a phenomenon when the dot-com boom first began.
Time and opportunity were not the only bones the pandemic threw Indian entrepreneurs. The economic hits from the COVID-19 pandemic forced the RBI to cut interest rates to stabilize the economy and bring growth on an even keel. Banks were encouraged to lend as a way to fuel consumption-led growth. This resulted in easy access to funds for a number of aspiring entrepreneurs who had an idea to sell, and the will to sell it. An easy money policy pursued globally ensured a strong inflow of foreign capital into the startup space.
From $11 bn in 2020, investments into Indian startups jumped nearly four-fold to over $42 bn in 2021. Much like the exponential explosion of investor money into the dot-coms that mushroomed across the US in the early 90s.
Just like in the early 90s in the USA, there’s a chance a lot of this massive investor interest is driven by FOMO (Fear of Missing Out), a gnawing sense of “they know something that we don’t.” This has allowed many startups to throw money at users – spending massively on advertising and promotions designed to build brand value, sometimes even at the cost of building a quality product or reliable service.
That tide is slowly turning. Of course, no investor will ever say it’s so, but anecdotally, startup founders and management teams have indicated there is a recurrent -- if not constant -- push from their investors to ‘show them the money’, often disregarding ground realities in the process. Some startups have delivered, and many more have folded and shut shop.
Investors have since turned wary, and with a funding winter setting in, startup growth rates are taking a hit. Against $42 bn in 2021, only $20 bn in funding has come into Indian startups in the first 7 months of 2022. This is reflected in both performance metrics, and operations.
Since the start of 2022, startups have fired thousands of employees in an effort to cut costs and shut down non-core or underperforming verticals. Layoffs have been announced across startups big and small, from Vedantu to Ola to Cars24 to Meesho. Byju’s, the poster boy of Indian Edtech, has also been feeling the heat. After reporting that its losses have risen to Rs 4,500 cr in FY21, the company has announced that it will be letting go of over 2,500 people.
Names like Peppertap, Freshconnect, Zebpay, Jabong and Stayzilla have vanished completely, and even unicorns like Ola and Zomato have trimmed operations -- Ola shut down its used car business and Zomato its grocery delivery pilot. Again, this is a trend that played out as the dot-com boom started being seen as more of a sound and light show. Once marquee names like AltaVista, EToys.com, Pets.com, Ask Jeeves, which commanded princely valuations and the backing of some of the biggest corporate players, are now a memory.
That quick exit many investors were hoping for has only worked out in a few cases – but even in many of these, the investors who bought in later have been left holding the bag. Through 2021 and 2022, IPOs from eleven Indian startups have hit the market. Some were among the largest IPOs in Indian corporate history. But only a few of them have given retail investors more than momentary joy – most of them are trading at levels sharply lower than their listing price.
That’s not to say that the startup space in India is in dire straits. According to PwC India, despite startup funding hitting a 2-year low of $2.7 bn in the July-September quarter of 2022, the mood among early-stage investors is still relatively upbeat. Two startups have even attained Unicorn status in the quarter. But as the report goes on to say, “fundraising is just an accomplishment, not a milestone… it does not guarantee great execution, which is the secret sauce for the success of startups.”
However, one cannot help but notice the similarities between what’s unfolding in the Indian startup space today, and what happened when the dot-com bubble shattered over 3 decades ago – an explosion of players driven by easy money, incremental ideas that are built on fashionable trends, an expansion spree that overheats quickly, an unravelling that is slow and painful, and a shakeout that sees names fade away into oblivion.
A lucky few were left standing, but they still had to stagger down a long road as they tried to regain their past glory.
Today, startups are a matter of pride for India, held up as a testament to the Indian entrepreneur’s solution-driven approach to problems. Their innovative spirit, chutzpah and risk-taking cojones will be tested. Those with a clear business model, strong execution capability and financial discipline, hope to ride out the storm.
Data Inputs: Yoosef Kutteparambil
(Edited by : Abhishek Jha)
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