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Is the startup environment in India in trouble?

Is the startup environment in India in trouble? 

Is there a problem with India’s startup ecosystem?

After a spectacular year, 2022 has seen a number of Indian startups make headlines for all the wrong reasons, including fraud allegations and layoffs. Is the dream of the nation’s startups failing?
It’s time for investors to take control once more and make the decisions while keeping values in check.

Meesho and Trell, among many other startups, are among those making cuts that are making headlines. That’s not all, though. Recently, several incidents of founder fraud have started to surface, to mention BharatPe, Xiaomi, and Zilingo.
These are businesses that have the support of major financiers like Softbank, Sequoia, and others and are obviously cleaning up their Asian table. Masayoshi Son of Softbank has advised the group’s senior executives to be cautious while making technology investments.

Huge investments have been made in India’s unicorns by Softbank’s Vision Fund. This feeling is repeated across the ecosystem.
Startups are at present moving in the direction of consolidation, and those who were pursuing high valuations are now focusing on profitability. Business concepts with excellent execution will prevail. We will undoubtedly feel the pinch when big-ticket finance slows down, “one of the top investment bankers in the country tells Business Today.

Shailendra Singh, the managing director of Sequoia India, recently stated on Twitter that he was expecting a much-needed correction in the startup financing climate and that he was grateful that discussions are once again centered on revenues, products, and unit economics, and cost-cutting.
In reality, Sequoia financed Ankiti Bose of Zilingo since she had before worked there. The same kind of encouraging feedback that before led to issues about responsibility is now changing.

What then is driving the current emergence of these stories?

“Investors are being forced to exercise higher caution because liquidity becomes tighter. There are inquiries being made. According to the M.D. of one of India’s largest V.C. fund firms, “Investors now want to see meat on the bones and not just made-up figures; they are no longer turning a blind eye. Some of these audits are coming up before a potential next round, and major investors don’t want to take a chance. The ecosystem is receiving a bigger message, “Adds the M.D.

Startups are receiving a reality check and being pushed to reevaluate business strategies and feasibility against the background of the U.S.’s expected Rate rises, inflationary pressures, and recent tech listings that are trading far below I.P.O. pricing.
It’s time for investors to take control once more and make the decisions while keeping values in check.

Another V.C. who talked to Business Today said that the domestic narrative is really strong. Interest rates are keeping steady, like are the stock markets and domestic investment. Before this abrupt slowness, large transactions, including Swiggy, Dunzo, and Dailyhunt, were completed, the V.C. said.

The V.C. said, “We will observe how valuations are looking for projects that started following this time from May August.” When questioned about the layoffs, he said that they are planned layoffs that can occur in any business and that it is at present simply a matter of fine-tuning across verticals.

“You can’t expect a startup to go from having a run Rate of hundreds of millions to only a few digits. They must and will continue to expand. Family Offices and large domestic funds are investing in the private markets. In the upcoming months, major deals will still be common, “said he.

But it is clear that there is a lot of uncertainty around the valuation problem. And entrepreneurs are at present experiencing pressure.
‘unicorns‘ continue to flourish despite high-profile sagas.

The term “unicorns,” which Venture Capitalists use to identify privately owned companies with a valuation of $1 billion or more, was said to have reached around 1,000 by January. It’s interesting that investors don’t seem to have been discouraged by the recent unicorn controversies.

Airbnb, Facebook, and Google are examples of well-known former unicorns, but not all unicorns go on to experience success on the same scale. Ask Elizabeth Holmes, the company’s founder and pioneer in blood testing, Theranos. She was convicted in California in early January on one count of conspiring to deceive individual investors, and three charges of wire fraud against investors. She probably potentially be sentenced to jail in September of this year.

Not just Theranos has received media attention in recent years, but other prominent startups. A word of warning is issued by Tim Weiss, assistant professor of innovation and entrepreneurship at the Imperial College Business School. He claims that the importance and audacity that startup culture promotes “may be harmful.” Rule-breaking is acceptable and even encouraged since, after all, it causes creative upheaval.

This may have dampened investor interest in startups, but new data indicates that hasn’t happened. According to data and software provider FactSet, over 500 venture-backed businesses will become unicorns in 2021. This was a major rise from the 178 businesses that would become unicorns in 2020.

About 60% of these businesses have their headquarters in North America. In North America, there were 84 unicorn businesses in 2020, and there were 310 by 2021, a more than threefold increase. Nearly 60 businesses in Europe became unicorns, quadrupling the number from the last year.

Many companies in emerging economies have seen rapid growth and membership in the unicorn club. For the startup ecosystem in India, for instance, 2021 was nicknamed “the year of the unicorn,” with 39 businesses reaching billion-dollar valuations over the course of the year. After the U.S. and China, India is at present the country with the third-highest population of unicorns.

More scrutiny and wiser corporate decisions will result from the scandals.
Paya, Alejandro

Senior Vice Chair, I.B.A. Closely Held and Growing Business Enterprises Committee
According to Kasturi Ghosh, partner at the Indian law firm Trilegal and Chair of the I.B.A. Corporate and M&A Law Committee’s Current Legal Developments Subcommittee, “Indian digital entrepreneurs received an astounding $24 billion from global investors in 2021, higherr than any prior years.” “The hype machine is still very much in motion.”

According to Ghosh, a perfect storm of variables seems to have caused this financial boom. Among these are the U.S.’s cheap interest rates, India’s growing online customer base, market leaders’ I.P.O.s, and China’s crackdown on I.T. firms, which has turned India into the next preferred location for investors.

According to Ghosh, “the epidemic hasn’t actually slowed down startups.” The majority of big companies have really been on an acquisition binge, gobbling up smaller competitors that were struggling or couldn’t raise money. But because funding normally operates in boom-and-bust cycles, this amount of activity is probably about to come to an end.

Alejandro Paya, Chair of the I.B.A. Closely Held and Growing Business Enterprises Committee and a partner in the Barcelona office of the law firm Cuatrecasas, claims that recent revelations from Silicon Valley have had a major impact on the media but haven’t actually changed the investment climate. According to him, professional investors are still very interested in innovative enterprises and technology. “The epidemic has hastened the usage of a lot of technologies by a major number of companies.” Ghosh continues that capital will continue to pursue tech-enabled companies.

The excitement around startups may lead investors and employees to make poor decisions. Paya thinks that scandals like Theranos are benefactions because they serve like a reminder to investors to focus on the fundamentals when deciding where to place their money. He claims that this will result in increased scrutiny and better business judgments. Because of this, “We are not witnessing a broad slowdown.”

startup environment

The transactions that Ghosh refers to like “F.O.M.O. (fear of missing out) deals” are those where investors jump on the bandwagon because they don’t want to miss the next great thing or are based on erroneous market signals or insufficient due diligence. ‘Staying disciplined after investments, putting in place effective corporate governance systems, routine financial monitoring and audits, E.S.G. goals and market situations, and of course, patience are crucial criteria for success.’

In 2022, if investment slows down, it’s probably due to other factors. For example, the advent of the Omicron variety of Covid-19 and the world’s well-publicized supply chain issues have put a wrench in the works.

The return of inflation, says Julian Birkinshaw, professor of strategy and entrepreneurship at the London Business School, may be of the highest importance. The levels are at present between four and five percent in Europe and North America, and once inflationary pressures begin, they can be hard to control.

According to Birkinshaw, inflation is bad for Business because it fosters uncertainty and discourages investment. Since the last important era of inflation was more than thirty years ago, it isnunknown ground for everyone under the age of 50.

The worst for Indian startups is yet to come — be prepared for layoffs, unicorn slowdown, and startup shutdowns in 2022

Only $1.6 billion was raised by Indian entrepreneurs in April 2022, which is less than half of what they raised during the same time the last year.
The parent firm of DailyHunt and Josh, VerSe Innovation, secured the largest fundraising round last month.

According to Gaurav V.K. Singhvi of We Founders Circle, investors are at present pressuring Indian entrepreneurs to focus on profitability.
The Indian startup ecosystem is not doing good like it did last year. The industry that prospered during the epidemic is now bearing the weight of the Russia-Ukraine conflict, which is slowing down their ability to get money.

Indian entrepreneurs only raised $1.6 billion in April 2022, according to the most recent IVCA-EY report. This is approximately half of what the same environment earned in April 2021. The situation was made worse by the fact that no new companies joined the unicorn club in April 2021, despite the fact that eight new unicorns had joined the club in April of the last year.

The slowdown in the production of unicorns is predicted to last through the second quarter until June 2022, but this is not causing concern, according to several experts Business Insider talked with.

The startup industry has been seeing an upward trend for the last 18 months, and “now for a few months, it seems a little slow,” according to Gaurav V.K. Singhvi, owner of the investment firm We Founder Circle. Additionally, he noted that this year may see the creation of more unicorns and that the trend will be largely favorable in the long run.
However, the quantity of unicorns is only one aspect of the issue.

The even higher value may be problematic.

The fall in big investment rounds is mostly to blame for the decrease in funding in April 2022. The parent company of Josh and Dailyhunt, VerSe Innovation, raised the most money last month when it gainedd $805 million at a $5 billion value. This accounted for about half of the funding that Indian entrepreneurs raised in April.

While not many companies have been successful in raising money during this financing recession, Dailyhunt has been able to boost its worth.

Media sources state that Meesho, an online retailer, has been attempting to finish a fundraising round at a valuation of about $8 billion, but no investor is now ready to give the firm that amount. Instead, because Meesho has a monthly cash burn rate of $46 million and was valued at $4.9 billion last year, investors are hesitant to give it a higher price.

According to Singhvi of We Founder Circle, many startups have neglected their bottom line for a long time, and now investors are pressuring these businesses to pay attention to their money and metrics. Revenue is great, but now they’re focusing on profitability and long-term viability, he continued.

For many startups, layoffs seem to be a last resort.

Many businesses have already begun planning for the worst. Business Insider calculated that 6,900 employees were let go by Indian companies in the first four months of 2022. Over 1,200 workers were let go by unicorns like Vedantu and Cars24 in only May.

Company Layoff
Better.com 3000
Ola 2,100
Unacademy 925
Vedantu 624
Cars24 600
Trell  300
Lido Learning 200
Furlenco 200
Meesho 150
OkCredit  40
Total

8,139

 


The chief executive and cofounder of Vedantu, Vamsi Krishna, said in a blog post that they were forced to make this difficult choice because “conflict in Europe, imminent economic worries, and Fed rate interest rises” may make funding scarce in the future quarters.

There will likely be more layoffs in the near future, as stressed by Yogita Tulsiani of iXceed Solutions and Sarbojit Mallick of Instahyre.
Tulsiani, the managing director and cofounder of the international tech-recruiter provider iXceed Solutions, noted that this drive would have an impact on both highly-funded and modestly-funded startups because the majority of businesses engaged in aggressive hiring drives at the beginning of the pandemic and are unable to manage their workforce at this time.

According to Sarbojit Mallick, cofounder of the advanced hiring platform Instahyre, every firm has a long-term strategy, and unforeseen events like the ones taking place right now may have an influence on their hiring and team sizes. He stated that the approach would also involve internal department restructuring, operational simplification, and gap closing.

Neha Khanna, director at management consulting firm ValPro, concluded: “The anxiety [for the workforce] is further heightened by rationalization in funding which will select out excellent organizations and thus lead to the winding up of certain startups.

But Why is this happening? Top 9 Reasons And How Entrepreneurs Can Avoid It
Despite having the third-largest startup environment in the world, 80–90% of Indian businesses fail during the first five years of operation. Why do startups fail, you ask? We identified some of the main causes of the same and discovered strategies that business owners may use to confront these startup failure scenarios.

Checklist For A Unicorn Company; Is It True That 90% Of Startups Fail? -  Inventiva
The following are nine causes of startup failure and measures you may take to prevent them:

1) A lack of creativity

Seventy-seven percent of venture capitalists believe that Indian entrepreneurs lack originality or distinctive business concepts, according to a poll. According to a report by the I.B.M. Institute for Business Value, the absence of innovation is the main cause of 91 percent of businesses failing during the first five years.

Despite having the third-largest startup ecosystem in the world, India lacks meta-level startups like the well-known Google, Facebook, and Twitter. Instead of developing their own business models, Indian companies are renowned for copying established international startups.

According to a list of the 50 most creative firms in the world, startups like ChaiPoint, Ola, Saathi, and Swiggy would be among the most inventive in India.

How can businesses prevent this?

Businesses may benefit from innovation in many ways, including increased production, differentiation from the competition, and the ability to efficiently handle issues. Startups should think about the following issues:
Do your study and understand the Indian market before copying successful foreign business models in India. Startups require highly skilled technical and inventive skills.

-Before pursuing ideas that are in vogue, consider the idea’s long-term viability.

-Locate the resources you need to innovate and drive the startup.

2) Lack of resources

The bike-rental Business Tazzo closed its doors in 2018. A failing product-market fit resulted in a lack of money, according to one of its fundraising partners. The firm closed its doors despite having collected a substantial sum of money due to the absence of a successful business plan.

There are countless startup ideas out there. But it takes money to make ideas a reality. Those that succeed in getting investment require successful and scalable business concepts to expand their startups. One of the main causes of startup failure is a lack of capital.

Many firms are forced to fold due to a lack of funding. One of the main causes of failure for firms that acquire seed capital is the inability to raise follow-on funds.

What are the main things to think about?

-Effective business and revenue models are essential for startups.

-From the beginning, startups must place an equal emphasis on sales and profit.

-Money must be used wisely.

3) Inattention

When asked to name one element that contributed to their success, Bill Gates and Warren Buffet both said the same thing: focus. Let’s look at an example to further understand how attention might be useful.

Food delivery startup Grubhub exists. The Business opted to limit its attention to meal delivery from the start. A business of such type might provide a wide range of other services, including food pick-up, catering, and others, but the owners decided to concentrate just on delivery. What is the outcome? They may successfully build the company via technological and operational execution.

Here are some tips for companies to stay focused:

-Look for both positive and negative comments.

-Don’t go overboard. One thing at a time, decide and concentrate.


4) Product Market Fit

The simplest explanation for why many firms fail is because there is no market for their products. Does your product provide customers value? Exists a market for your product?

Is your product consistent with the ground-breaking principles around which your Business is built? Startups frequently make hasty attempts to create items for which there is no market or to widen the market for an existing product.

How can you prevent this?

-Learn everything you can about your consumers, including how they feel about your product.

-Before launching into pricey marketing strategies, seek new clients through word-of-mouth.

-Create a connection with your consumers.

-You shouldn’t strive to please everyone since you can’t.


5) Management flaws

The founders and key team members’ visions are what propel the majority of companies. The ability to manage a team, a company, and a brand are far more crucial than having a fantastic concept. Another typical reason why businesses fail is a lack of vision and capable leadership.

why businesses fail

According to the Harvard Business Review, “An enduring organization requires a system of leadership that is instituted very early in its history, whereas a principled founding team can build a great company.” While some business owners may naturally possess leadership skills, others may need to work on them. This may be a contributing factor in the failure of startups.

How can you prevent this?

-If you lack leadership abilities, assign the task to someone else who could perform it more effectively than you.

-Practice and study leadership.

-To develop your leadership abilities, choose a mentor.

6) Lack of nimbleness

India's Unicorn Step-Function Growth Signals the Emergence of its  Innovation Ecosystem | ORF

We now live and work in a culture that is constantly connected. Always staying current with changes and complexity is necessary. Agility may provide entrepreneurs with a competitive edge in such a culture.

Hindustan Unilever Limited, the largest consumer products manufacturer in India, made the decision to collaborate with startups in 2015. You might be surprised to learn why they did it. To restore their agility, they did it. The change assisted the Business in acquiring the adaptability and agility that are hallmarks of startups.

Startups may experience a variety of growing pains. Additionally, they must continually overcome difficulties for which they must discover answers. Since change is inescapable, it is crucial for startups to continue to be flexible and nimble in order to advance.

Startups may promote organizational agility by doing the following:

-ongoing education

-a flexible workforce

-development and research

-Be open to having your opinions changed.

7) A bad business model

Many company owners believe that having a quality product, an eye-catching website, and a significant advertising budget will be sufficient to draw in clients and generate revenue. They disregard the substantial expenses associated with client acquisition and customer retention and the necessity for a company to have a solid business plan.
In order to create a good business model, entrepreneurs might start by asking themselves the following two questions:

Do you have a scalable client acquisition strategy for your startup? Could you locate one?

Can you make money from those consumers after you get them? Will the income from that customer exceed the expense incurred in acquiring that customer?

8) Talent and competence deficiencies

Unexpectedly, 23 percent of businesses fail because of a lack of people and expertise. One would expect that it is among the most simply fixable problems. It is not, though. The causes?

Finding the best people takes a lot of time and effort for startups. Startups may struggle to find a better candidate to replace a problematic employee under certain circumstances.

Startups frequently lack funding and are unable to afford to engage expensively skilled or experienced workers.

What could entrepreneurs do to address this problem?

-They take great care in planning their employment practices.

-Develop other working strategies, such as teaming up with knowledgeable specialists to do projects on a freelance basis.

-Give candidates a genuine problem to solve to tighten up the recruiting process.

9)Disregarding clients

Startup owners frequently have too much on their plates, including managing the organization’s finances, hiring new employees, and more. Customers might not even be on their lists of things to accomplish. Entrepreneurs often overlook this serious issue, which may very well be the reason why firms fail.

According to a Harvard Business Review article, companies who are devoted to being customer-centric find that making decisions is simple, that their focus is limited, and that word-of-mouth marketing enhances their appeal. Customers can also assist startups in improving their goods and services since they are aware of what they want.
What you should do is:

-Don’t dismiss your customers.

-Respond to consumer questions, comments, and suggestions.

In order to expand, you must address the shortcomings and difficulties of your startup. Then, worthy of all your efforts?

India’s startup explosion: more pitfalls than a promise?

With over 60,000 businesses and 65 unicorns (companies valued at $1 billion or more), India boasts the third-largest startup ecosystem in the world. However, 90% of these businesses are expected to fail within the first five years, making it challenging to join the market. The hidden problems of the Indian startup industry are discussed by Vipin Sreekumar, Priya Rachel David, and Palash Deb.

Because investors can now easily obtain information on international companies and their working environments, the pandemic has spurred digital adoption by organizations globally. This has facilitated the flow of cross-border investments.

Startup transaction values are skyrocketing in the western markets, which are hot and dominated by legacy investors like Tiger Global, Andreessen Horowitz, and Sequoia Capital (The Economist, 2021). As a result, a lot of international investors are looking into the sizable and flourishing startup marketplaces in developing nations, especially China and India.

Although much has been written about the several benefits of the Chinese startup environment, the Indian startup landscape seems promising and requires further investigation. With over 60,000 companies spread over its 642 districts, India boasts the third-largest startup ecosystem in the world. With funding from important international investors flooding in by April 2022, India is home to up to 65 unicorns across several industries.

Most of the of Indian businesses are predicted to fail under the first five years, despite the euphoria surrounding them. Therefore, before making a move, international investors need to look out for potential dangers.

Dissonance between cultures

Indian businesspeople have a different worldview than their colleagues in the west. For example, the former is less willing to divulge information and takes longer to build confidence with strangers (Harriss, 2003). Additionally, there have been instances of early-stage Indian companies wasting the money of investors (Rajagopalan and Zhang, 2008). Contrast this with western nations, where more stringent socio-ethical standards drive businesspeople to handle investors’ money like though it were their own.

An example in point is the recent claims of financial wrongdoing made against the founders of the Indian fintech firm Bharat. In addition, it is usual for family members to hold crucial leadership positions in Indian startups due to society’s focus on close-knit family relationships (Warner, 2014). It is difficult to replace them, suggesting that future conflicts over governance issues may occur if the Indian founding family is resistant to handing up any authority, even to investors with important ownership shares.

Misjudging the client and the market

India is estimated to have big market potential with a population of 1.4 billion, including a “middle class” of about 600 million people. However, considering the very smaller de facto size of the Indian market, this can be misleading.

For instance, consider consumer technology. There are 622 million active internet users in India, but most of them only have entry-level smartphones with limited processing power and memory, according to a 2020 study by the Internet and Mobile Association of India. Additionally, the middle class in India has far less absolute buying power than the middle class in Western countries (The Economist, 2018).

According to Sahney et al. (2013), many Indian consumers fear internet transactions, which makes it more difficult for startups located far away to draw in these consumers who often shop at conventional neighborhood establishments that only accept Cash.
The Indian consumer is very price-sensitive (Mukherjee et al., 2012), which makes it difficult to keep customers and causes money to be spent on discounts and promotions.

Regulation and other variations

Contrary to common assumption, excessive regulation that results in cumbersome administrative procedures damages Indian companies more than a lack of regulation (India Economic Survey, 2021). Another prevalent regulatory ill is under-implementation, which is the opposite of over-regulation.

In general, startups often establish markets that are beyond the purview of the current legal framework (like the absence of complete laws for self-driving cars), and this issue is exacerbated in India. Additionally, regulatory reversals are a problem for Indian entrepreneurs (The Economist, 2020).

For instance, payment wallets and other subscription-based business models experienced major interruptions being a result of the Indian central bank’s recent removal of the auto-payment functionality for recurring payments.

India is not one big, uniform market; rather, it is a collection of several micro-markets that are segmented not just according to state-specific laws but according to income levels, regional economic growth, and cultural traditions. Because of them, companies must traverse a maze of legal and related complexity in order to succeed (David et al., 2021).

Considering students beyond the Ivy League.

Foreign investors have usually indicated a preference for funding companies formed by graduates of the Indian Ivy League colleges, the Indian Institutes of Technology (I.I.T.s) (Table 2), and/or the Indian Institutes of Management (I.I.M.s) (Table 3). (Nigam et al., 2020). But using academic credentials like a stand-in for entrepreneurial prowess probably result in bad investing choices. When evaluating entrepreneurs, investors must consider factors other than academic credentials, like social capital, technological prowess, founding team experience, startup alliances, patent filings, access to government funds, or even relationships with other Venture Capitalists or third parties (Colombo, 2021). Foreign investors may find it beneficial to test the startup waters in India by collaborating with regional incubators and accelerators.

Exit fees

Foreign investors must remember to maintain an exit door open during the first exhilaration of investing in a potential business. In the Indian market, exit probably be challenging (Dominic and Gopalaswamy, 2019; Figure 3). Startups are rarely purchased for large sums of money, unlike Walmart’s $16 billion purchase of Flipkart in 2018. Many startups are “marked to myth” rather than to market. Hence the majority of acquisitions do not result in high-value agreements (The Economist, 2020). It takes a lot of work to carry out a successful I.P.O.

The number of startups going public is still quite low when compared to the U.S. or China, despite the wave of I.P.O.s in 2021 (examples include digital payment giant Paytm, food delivery company Zomato, and the cosmetic e-tailer Nykaa) and the relaxing of regulations by S.E.B.I. (India’s capital market regulator). This is due to retail investors’ rather tepid engagement in the Indian capital market, which is still relatively immature (Giannetti and Koskinen, 2010).

Following a successful listing, the market prices of many recently listed stocks often experience a sudden decrease, leading many retail investors to doubt the high valuations of these stocks. Due to this, many companies have had to reevaluate their intentions to go public, which makes it more challenging for investors to find a viable exit.

With total financing expected to reach $70 billion between 2014 and 2024, the Indian startup ecosystem will continue to expand quickly (Inc42, 2021; Figure 5). Running a successful company in India is still a difficult task, despite the optimism. Particularly foreign investors need to be aware of the potential pitfalls of investing in India.

edited and proofread by nikita sharma

 

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