When Jiten Sharma (name changed) was offered a fourfold hike in salary to join one of India’s fastest growing startups as a product engineer last October, he was happy.
“Demand for engineers had skyrocketed in 2021 and these new companies were offering crazy packages as they looked to expand aggressively,” he said.
“I had a discussion with my family, especially with my father, who was not convinced about this (Sharma joining the company). He wanted me to join some established company for the sake of job security, but I told him that the company had raised crores of rupees recently and was hiring robustly. I was able to convince him that my job would be secure there,” Sharma said.
Little did Sharma know that the startup - then called a ‘soonicorn’ or a privately funded company valued between $500 million and $900 million - would sack him along with hundreds of others in only about eight months after raising close to $100 million, citing a funding crunch.
“Now, as I look back, I think dad was right. I haven’t gathered courage to talk to him about this since I was laid off,” the 24-year-old shared with Moneycontrol, after he lost his job last week.
Thousands of layoffs
Sharma represents thousands, who have been sacked by well-funded startups since the start of 2022. According to data compiled by Moneycontrol, startups have fired over 5,000 employees so far this year.
Anand Lunia of venture capital firm India Quotient expects more heads to roll this year as startups look to cut costs. He, however, said that the laid-off employees would be able to get a job soon as he believes that India has always had a talent crunch.
“Employees should realise that if startups are raising funds so aggressively, then they are also burning cash aggressively. So, while you celebrated great hikes last year, you should have expected this now as the biggest spenders were going to be the first ones to cut costs,” Lunia said.
Startups have also resorted to shutting down non-core verticals, rationalising marketing and advertising spends and have gone on a hiring freeze, as they enter a bleak period, after a blockbuster funding party that lasted for nearly two years.
“Think about it from a company’s perspective. If they don’t cut down the flab, if they don’t reduce the burn, many companies will die. So they have to cut all kinds of costs as funding has slowed down,” Lunia said.
A spike in inflation and hike in interest rates after the abundant liquidity last year has had a knock-on effect on startup funding, as investors cut down on investments to public and private markets, allocating their money to bonds instead. Lockdowns across the world have also impacted supply chains. Add to this the Russia-Ukraine war, which has pushed up fuel prices and consequently transport costs. All around, the sentiment has turned bleak, a stark contrast to the euphoria in 2021, where India minted a new unicorn almost every week.
According to data shared by market intelligence firm CB Insights, venture funding to India-based startups dropped to $3.6 billion in the second quarter of 2022 so far from $8 billion in the January-March quarter and over $10 billion a year back. The data also showed that venture funding slowed for the first time sequentially in the January-March quarter of this year since the October-December quarter of 2020.
“There was intense competition between private equity and venture capital firms over the last two years, thanks to the abundant liquidity in the system and rapid adoption of technology, which led them to deploy billions in tech startups,” said an investment banker requesting anonymity.
“But they made some losses either through IPOs or down rounds and have thus taken a backseat now. Sovereign wealth funds are still deploying cash but they need clarity on business models of high-cash-burn companies, so I feel, larger rounds will slow down this year and will largely be led by sovereign wealth funds or pension funds. Profitable startups or companies with strong unit economics will get this money though and high-burn startups will struggle,” the banker said.
So far in 2022, the five largest deals by startups, which account for a fifth of the total venture funding in India, have been led by sovereign wealth funds and pension funds such as Ontario Teachers Pension Plan, Canada Pension Plan Investment Board and Qatar Investment Authority with private equity and venture capital firms taking a backseat.
In 2021, the top five deals were led by late-stage private equity and venture capital firms like Footpath Ventures, GSV Ventures, Redbird Capital Partners, Alpha Wave Global and Prosus Ventures.
“Most investors who can lead rounds of $40 million or more are based outside India. Many invest in a mix of asset classes. Even if they have funds to deploy, there are many claimants to that capital, including public equity and private investments in their home countries,” said Ritesh Banglani of Stellaris Venture Partners.
“Many have pulled the plug on ongoing funding discussions and even signed term sheets. We expect a prolonged period of pain for any growth-stage startup that gets caught with a short runway at this time,” Banglani said.
Stellaris has advised its portfolio companies that have recently raised capital and are looking to raise a growth round next to plan a 24-month runway. However, for early-stage companies, Banglani said that an 18-month runway could be adequate.
“For earlier-stage companies, such a long runway may be counter-productive: their objective is not survival but finding product-market fit quickly. To achieve that objective, a runway of 18 months should be adequate,” he said.
“Of course, such advice must be backed by the willingness to fund the company further if they continue to perform, which is a commitment we are making to earlier-stage companies.”
Multi-stage venture capital firms like New York-based Tiger Global and Japan’s SoftBank Group, which have been aggressive investors in Indian startups, have also said that they will be going slow on investments this year.
SoftBank, which has been an aggressive investor in India over the last five years, said it will cut its investments to a fourth globally in 2022, compared to 2021. Tiger Global said it will back more early stage companies this year, in what is a shift for the late-and mid-stage investor. Tiger Global also marked its first seed-level investment in India this year.
Disastrous tech IPOs and hammering in public markets
SoftBank and Tiger Global’s cautious investment approach follows record losses that the two investment companies clocked on their multi-billion dollar venture funds, thanks to an unprecedented slump in valuations of technology companies across the globe.
SoftBank’s Vision Fund investment unit posted a loss of over 2.97 trillion yen ($23.29 billion) for the January-March quarter against a net profit of 4.03 trillion yen ($38 billion) a year earlier as its portfolio of listed companies took a beating amid falling tech valuations across the globe with investors pricing in interest rate hikes and China tightening regulations on the industry.
SoftBank’s two biggest portfolio companies - South Korea’s Coupang Inc and China’s Didi Global - have plummeted in the January-March quarter. Coupang Inc’s shares have fallen as much as 70 percent since its listing price. SoftBank’s $8.2 billion investment in Coupang is valued at $2.2 billion, according to the company’s financials.
Paytm’s parent One97 Communications Ltd, and PolicyBazaar’s parent PB Fintech Ltd, which are among SoftBank’s largest portfolio companies in India, are trading much lower than their listing prices, hitting the Japanese conglomerate’s financials.
SoftBank’s $1.4-billion investment in Paytm, has a fair value of around $800 million, while the Japanese conglomerate’s $400 million investment in PB Fintech has a fair value of around $100 million.
Tiger Global said it increased early-stage investments in private companies through its newest and largest venture capital fund of $13 billion, which it raised in March. The New York-based hedge fund company told investors earlier this month that more than half of the fund’s investments were in Series A or Series B rounds, typically the first or second big financings for private technology companies.
The shift in the hedge fund’s strategy to invest in companies at early stages comes after Tiger Global’s total value of public stock positions fell to $26 billion at the end of the March quarter from over $46 billion in the previous quarter.
“The hammering that some of the stocks like Zomato, Nykaa, Policybazaar, and Paytm have received in public markets is making investors wary of exits in the future, and that’s again a significant reason why some of the startups that had planned fundraising rounds or IPOs have either pushed back or cut down the amount and valuations,” said the investment banker.
“Startups that cannot run without money, and unfortunately we have plenty of those, are seeking down rounds or are also looking at raising debt,” the investment banker added.
Banglani of Stellaris said that during down cycles like these, more capital tends to flow to proven revenue model and profitability models.
“This presents an opportunity for early-stage VCs to take bolder bets in companies where the business model is unclear but who can execute with a low burn for an extended period of time. Such opportunities exist in core technology areas, as well as certain segments in Fintech and SaaS (software-as-a-service),” said Banglani.
“Companies that will struggle the most are those that rely on high burn for growth and who did not raise adequate capital in the previous financial year. Once the tide turns, it is very difficult to arrest the vicious cycle of cost-cutting, declining business metrics, low investor interest and talent flight.”
The investment banker and Banglani’s comments come at a time when many startups and unicorns have been compelled to push back their fundraising plans.
“For those raising funds in the next six months, it will be challenging, given usual aggressive investors with storied penchant for quick decisions over zoom calls, sparse due diligence, aggressive valuations are taking it easy with a wait-and-watch approach. So, expect more time to close funding rounds, more support and bridge rounds from existing investors, companies trying to conserve cash through cost-cutting strategies,” said K Ganesh, a serial entrepreneur and promoter of BigBasket, Portea Medical, HomeLane, BlueStone.
“Startups and founders can expect lot more questions from investors on path to profitability, unit economics, so start working on these aspects more than how you will conquer the world,” Ganesh added.
Unicorns such as Meesho, Slice, Cred, Unacademy and Groww are taking an unusually long time to close their next funding round. Even if they manage to close it, it will be at a lesser valuation than what they bargained for.
In fact, sources said SoftBank-backed e commerce firm Meesho had mandated Morgan Stanley for its fund raise.
“Meesho was on the look out to raise more capital and Morgan Stanley had got some reverse inquiries. Once the market turned south, it didn’t make sense to continue with conversations till there was more stability in valuations,” a person familiar with the development said. Meesho did not response to queries.
On the other hand, sources said fintech Slice is struggling to raise a fresh round as its current investors Tiger Global and Insight Partners wanted the company to bring in a new investor to lead its next round.
Cut the burn
"Cut the burn, cut the burn, cut the burn is the only thing VCs are saying these days, a few months after asking startups to chase growth," said one of the sources mentioned above, who has been an active investor in unicorns and has seen such down cycles.
"But there is still some salary inflation and some startups are yet to smell the coffee. Even now some of them want to raise $30 million at the seed level," the source said.
Another person quoted above said requesting anonymity that even businesses with good metrics will struggle to raise funds, thanks to the overall sentiment in the market.
"It is amazing how things have churned so quickly in 2 months. Ed tech is in deep, deep trouble, with schools now reopening. Fintech is not in that much trouble but funding will be tough. Family offices calibrate their investments with public markets. With their public holdings taking a hit, they are now pulling back from the private market as well," the person said.
"Indian startups need $10-$15 billion in the next 6 months, but the availability is only $2-$4 billion. Most funds have turned conservative and are only cutting cheques for early stages. I expect at least another 10,000 job losses, as more startups struggle to raise money," the person added.
Fewer and smaller funding rounds means fewer unicorns. While it was a founder’s market last year, investors are now in a dominant position, as they seek more equity for a smaller amount.
According to data compiled by Moneycontrol, investors have minted only 1 unicorn in April and May this year compared to 15 unicorns in the same period last year. Interestingly, this year, many rounds have happened at valuations between $800-950 million, showing reluctance by investors to value startups at north of $1 billion.
The much-talked about fundraise by quick commerce company Zepto, happened at a valuation of $900 million. Agritech startup Ninjacart raised $145 million at a valuation of $815 million.
“Last year was an unprecedented year for startups in terms of quantum of funds raised, valuation milestones, number of unicorn valuations,” said Ganesh.
“It is therefore expected that there will be reversal as this trend cannot continue year on year as we have seen in the past in both private and public markets. This type of tempering is good for entire ecosystem and helps to ensure the fall is not severe after the rise,” Ganesh added.
As the startup party comes to an end, founders now have to prioritize stronger unit economics, less cash burn and rationalized customer acquisition costs. As Lunia of India Quotient said, “India’s startups had got used to a 24x7 party and now they are facing withdrawal symptoms. So I would call it withdrawal symptoms and not a slowdown.”Corroborating Lunia’s comments, Ganesh said, “Entrepreneurs are very resilient, the ecosystem has faced this multiple times, I am confident it will come out of this as usual. I don’t see anything more severe or unusual other than given the size and scale of the ecosystem the stakes and numbers are much larger. Till then ride the storm, stay alive.”