From GoMechanic to ZestMoney: Why thousands of startups shut shop in 2023

While several unfunded startups were a part of the list, multiple other companies who had raised millions from marquee investors also joined them

Investors tightened their purse strings and began cherry picking the startups they funded in 2023. The result? Thousands of companies, who solely depended on venture capital for their survival, had to shut shop. The others had to wind down operations because of financial wrongdoing or an evolving regulatory landscape.

The number of deadpooled startups, or companies that shutdown or were pushed to the brink of a shutdown, stood at 34,848 in 2023, as per Tracxn, a private markets data provider. In 2022, there were 18,049 startups in the same category, Tracxn had said. That is out of over 1,00,000 registered startups in India, per government records.

While several unfunded startups were a part of the list, multiple other companies, which had raised millions from marquee investors, also joined them as they decided to wind up operations. Some new age companies bit the dust owing to an evolving regulatory landscape, while others had to wind down operations because of an unfavourable macroeconomy/failure to get the right product market fit (PMF), financial wrongdoing, among other reasons.

Regulatory landscape

ZestMoney, which was valued at $450 million in September 2021, was among the most notable shutdowns in 2023. The poster child of the buy now pay later (BNPL) industry had raised over $130 million between 2015 and July 2023 but things went south after an acquisition deal with PhonePe fell through. The company was quick to go back to the drawing board, but its turnaround plan, dubbed ZestMoney 2.0 or ZeMo 2.0, did not take off.

While Zestmoney had to wind down operations because the Reserve Bank of India (RBI) was taking a closer look at BNPL businesses, gaming startups were faced with a different regulatory challenge.

In September, the Central Board of Indirect Taxes & Customs (CBIC) said online real money gaming will attract 28 percent Goods and Service Tax (GST) from October 1. The decision caught several companies off guard and even resulted in shutdowns.

Quizy and MPL-backed Striker were some companies that shut down, while others such as Fantok halted operations. The move to levy 28 percent GST on companies also resulted in a string of layoffs.

"This 400% increase in GST is a bazooka pointed at us. We'll need to absorb some of it," Rush Gaming Universe’s Kavin Bharti Mittal had said earlier.

Similarly, even Pillow, a crypto investing platform, which had raised $21 million, had to shutdown because of ‘difficult regulatory headwinds’.

While ZestMoney and Striker saw their business models fail amid a tighter regulatory landscape, other companies simply didn't yield the desired results needed to survive.

No Product Market Fit

Anar, a B2B startup backed by Accel and Elevation, said it was shutting down in November because it kept changing its business model.

“...2023 – the most difficult period of Anar’s life where we switched between different models on a continuous basis. We tried many different ways of transactions (going against our original thesis!)...However, on doing all this, we noticed retention was still low and buyers were not getting enough value,” Nishank Jain, co-founder of Anar, wrote in a LinkedIn post.

In hindsight, Jain said his company should have hired fewer employees while they were in their pre-PMF phase. He added that he was returning the unused capital to investors.

In a similar move, FrontRow, an edtech startup which shut shop, also said it was returning unused capital to investors.

“Everyone in the industry overestimated the growth potential of startups, especially edtechs, solely because they thought the pandemic would last longer. But retention was a challenge in the post-pandemic world. Sure, companies can keep trying multiple things but at one point, founders need to accept that their model will not work anymore. In that case, returning money is the wisest decision as it only increases credibility for the next time,” said a founder who had to shut down his company.

Financial fraud

While overestimation resulted in some failures, there were also instances where cheap money, thanks to rock-bottom interest rates during the pandemic years, led to the downfall of a few startups.

GoMechanic, which had raised over $50 million from Peak XV Partners (formerly Sequoia Capital India), Tiger Global, Chiratae Ventures, and several others, was one such company.

The company, that was into car repair and sold accessories, overstated revenues and diverted funds, as reported earlier.

“...we got carried away. Our passion to survive the intrinsic challenges of this sector, and manage capital, took the better of us…we made errors in judgement as we followed growth at all costs, including in regard to financial reporting, which we deeply regret,” Amit Bhasin, co-founder, GoMechanic wrote on his LinkedIn.

GoMechanic’s episode pushed investors to demand for a more thorough due diligence process so such problems could be avoided.

Yet, roughly six months later, it was found that Mojocare, a healthcare startup, was overstating revenues to achieve growth targets. Peak XV’s Surge, Chiratae Ventures, and others demanded that the founders return investors’ money.

While investors said startups will continue to fold up in 2024, the reasons will be different. Since capital has become difficult to access, the quality of companies that are built will be better.

The Indian startup ecosystem is the third largest in the world, behind the US and China. New age companies have together raised over $8 billion in 2023, and over $140 billion since 2015, underscoring the potential of startups.