Lonely dead pool club: Shutdowns fall 99.8%, startups face a zombie threat

While founders have now become more prudent, there are firms that continue to burn cash to survive and may soon end up in the dead pool once their runway ends

Homegrown micro-blogging platform Koo last week became the only fourth startup in 2024 to enter the dead pool club, which has seen a massive 99.8 per cent decline this year so far.

Investors say the recent wave of startup shutdowns — exacerbated by the so-called funding winter — was a “necessary cleanup”, with founders now focusing on improving operational metrics. However, the startup world may not be completely out of the woods yet, as ‘zombie’ startups have emerged as a new threat, they said.

Koo shut down operations last week after acquisition talks failed. Other notable startups that have entered the dead pool in recent years include Niki, Zipgo, Crejo.Fun, FrontRow, and GramFactory.

“Founders need to ensure their business models work from Day 1. Companies like Koo, operating on a ‘copycat’ model without differentiation, cannot survive in a market like India. The market is ruthless and will sweep away lazy ideas,” said a prominent investor, speaking on the condition of anonymity.

Decline in the dead pool

In 2021, 5,868 startups shut down due to macroeconomic headwinds. This figure fell to 1,720 in 2023 and just four in 2024 so far, as macro conditions improved, according to Tracxn, a market intelligence platform.

This decline, in part, can be attributed to the funding winter, which, according to investors, has instilled “fiscal discipline” among founders.

“Over the past year, many companies have sacrificed topline growth to boost their gross profit margins. Multiples have shifted from revenue to gross profit. The prospect of a strong initial public offering exit has also drawn founders towards profitability,” said Vikram Chachra, founding partner of 8i Ventures, a fintech-focused venture capital firm.

Startup funding has also risen. Although funding declined 13 per cent year-on-year (Y-o-Y) in the first half (H1) of 2024, companies raised $4.1 billion during this period, a 4 per cent increase from $3.96 billion in H2 2023, following four consecutive half-year periods of declining funding since 2022, according to Tracxn.

Moreover, the number of layoffs among startups decreased by 62 per cent Y-o-Y to 3,600 in the first five months of 2024, from 9,596 in the same period the previous year, Business Standard had reported earlier.

Despite these positive indicators, the country’s startups may not be out of hot water yet.

Cash-burning zombies

While founders have become more prudent, some firms continue to burn cash to survive and may soon enter the dead pool once their runway ends.

“Several companies raised large rounds a few years ago at inflated valuations, without proper business models. They have enough money to survive for a few years. Once the cash runs out, more companies may shut down,” said the investor quoted above, who did not want to be named.

Dubbed ‘zombie’ startups, these companies are technically operational but lost their vigour.

“These companies keep their doors open just enough to avoid being written off by their investors and contribute to the number of ‘active’ startups despite their lack of real growth or impact,” said Anirudh A Damani, managing partner, Artha Venture Fund, a micro-venture capital fund.

As the market cooled down over the past 12-18 months due to the funding freeze, fewer startups have been launched, leading to fewer shutdowns.

Damani said the trend of declining shutdowns was “cyclical” and that more startups might shut down in the future.

“It’s the natural ebb and flow of the entrepreneurial ecosystem. The current decline in shutdowns might signal the beginning of a new bull run, but as that cycle matures and peaks, we should expect the number of shutdowns to rise once more,” he said.

While the numbers look better, investors continue to operate with cautious optimism, focusing on companies exhibiting sustainable growth rather than “quick wins.”