 "Funding drought could boost start-up M&As; many takers for 'Deadpool' list")
India’s start-up sector might be going through a bust cycle with a clear dearth of capital that’s squeezing companies to improve unit economics and in several cases shut down, but there’s still lots of money to be made.
A list, put together by Bengaluru-based start-up Tracxn, comprising details of nearly 800 dead and dying Indian start-ups – dubbed the ‘Deadpool’ list – is making the rounds across board rooms of start-ups, investors, and large corporates, who are looking to scoop up these firms for technology and talent on the cheap.
“The reason we started coverage of start-ups in the 'Deadpool' list was because we work with a lot of corporates and large companies, as well as investors, who are looking for acqui-hires. Instead of hiring a fresh team, a lot of founders preferred companies that have launched a product, worked on it for two years and have seen that journey,” said Neha Singh, co-founder at Tracxn.
The year 2015 was seen as a golden year for Indian start-ups as valuations soared and cash was easy to come by, but it became disturbingly clear by the end of the year that the party wasn’t going to last. Start-ups that burnt through their capital with exuberant marketing campaigns found themselves stuck, with revenues that were negligible and investors unwilling to back them further.
The wisdom of industry big wigs such as Nikesh Arora, former vice-chairman of SoftBank, who warned Indian start-ups of splurging on marketing, had come too late.
Currently, there are 753 companies in the Deadpool list. While Tracxn estimates that number to be much higher, they say that intelligence on smaller unfunded companies is sometimes lacking. Out of these, there are 82 companies which have been funded, with 57 of them disclosing the funding amounts that tallied to a total of $58.5 million.
“If you look at a lot of these larger companies, like FreshDesk, Flipkart or Practo, they have made a lot of acquisitions in the recent past. These (deadpooled) start-ups may have potential but for whatever reason their next round might be getting delayed and metrics are falling which indicates that they might be winding down,” added Singh.
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A majority of the start-ups that have raised money but have shutdown, raised less than $1 million, indicating that the availability of capital post the angel round was largely absent. While the existence of the list might be a little derogatory when portraying the success of India’s start-up sector, global estimates suggest that only one out of ten start-ups survives, which makes these shutdowns only a part of the process.
Experts say that the so-called funding drought is only a correction, pointing out that large investors such as Sequoia, Tiger Global, Accel, Kalaari Capital and others are sitting on massive amounts of money which they have to deploy over the next few years. Once the frenzy dies down, investments will grow again, possibly by the end of 2016.
Close to $9 billion flowed into Indian start-ups in 2015, but in the first half of 2016 that figure stood at between $2.1-2.5 billion, a sharp decrease. Further, it is unlikely that the sector will grow to match last year’s investment levels in the second half of the year.
While the redeployment of talent from companies that have shut down into other start-ups is a great move, some say the gesture is gaining more visibility than the actual companies. So far, not a single 'deadpooled' company has been acquired in India, but the talent churn from one start-up to another has been ongoing for years now, despite the existence of such a list.
“There is no such demand whatsoever. If there was any such demand, you wouldn’t have 700 companies in the Deadpool list,” said Mahesh Murthy, co-founder of Seedfund.
“I’m not against anyone acquiring companies, but we should understand that at any point of time companies will start and companies will die. It’s just that there are times when there is money and times when there isn’t, but it doesn’t mean that companies won’t be started if there’s no money in the ecosystem,” he added.