Is there a scary twist ahead in the Indian start-up story?

 Investors, founders and CEOs have started sounding bugle on an impending funding crisis for start-ups and are taking a sombre tone on the medium-term outlook of the ecosystem. 

After raising a record $35 billion in 2021, Indian start-ups are staring at falling valuations and a slowdown in funding as investor sentiment turns negative after more than a decade of bull-run that saw India mint a 100 unicorns.  

This has prompted several start-ups lay off employees as focus turns towards profitability and cash conservation to increase runway. The latest to do so are SoftBank-backed pre-owned e-commerce platform Cars24 and ed-tech start-up Vedantu, which had turned unicorns in the last two years.  

Cars24 reportedly laid-off 600 staff, making up 6% of the company’s total employee strength whereas Vedantu laid off 424 employees, about 7% of its workforce. It had laid off 200 of its contractual and full-time employees earlier this month.

Ed-tech unicorn Unacademy, too, recently laid off about 10% of its staff or 600 employees, including contractual workers and educators. Back in March, it had cut 100 jobs from its PrepLadder team.

That’s not all. Over 800 employees of WhiteHat Jr resigned from the Byju’s-owned start-up in the last two months after being asked to work from office. And in February, ed-tech startup Lido Learning shut down operations.

Social commerce start-up Meesho, which more than doubled its valuation last year to $5 billion, sacked 150 employees from its grocery business last month. 

Vedantu cited a tough external market environment which means “capital will be scarce for upcoming quarters.”

Co-founder and CEO Vamsi Krishna told employees that it was important to build a longer capital runway of at least 30 months given the uncertainties of the outside world and tightening of capital availability expected for the next few quarters.

He cautioned that with Covid tailwinds receding, and schools and offline models opening up, the hyper-growth that Vedantu experienced during the last two years will also get moderated.

Japan's SoftBank, which is India's biggest tech investor, with more than $14 billion in investments, has reported a record loss of $26.2 billion at its Vision Fund investment arm. Its founder and CEO Masayoshi Son said that this year the firm may invest only half or a quarter of what it did last year.

Uber CEO Dara Khosrowshahi said his company will reduce expenditure on its marketing and incentive activities and treat corporate hiring as a “privilege” in response to what he called a "seismic shift" in investor sentiment. 

Prominent Silicon Valley incubator and startup fund Y Combinator, which has investments in over 150 Indian startups, has advised its portfolio founders to “plan for the worst” as fears of an economic downturn in the US grow.

Regardless of a founder’s ability to raise new funds, it’s their responsibility to ensure the company will survive for the next 24 months even if no new fundraise happens, it added.

Y Combinator also said that poor public market performance of tech companies significantly impacts Venture Capital investing.

In India, shares of startups like Nykaa and Zomato which had blockbuster listings last year, are down 67% and 43% from their peaks, respectively. Paytm is trading 73% below its IPO price.

Nithin Kamath, the founder and CEO of India’s largest brokerage Zerodha, said that misjudging the market size and opportunity, then setting wrong expectations and chasing valuations are probably the biggest reasons why startups fail.

Kamath, whose Zerodha is boot-strapped and profitable, noted that sustainability was more important than valuation. 

According to Prajakt Raut, Managing Partner, Supply Chain Labs, things will turn a little more bleaker than what they currently are. As such, early-stage startups seeking funding will have to get much stronger fundamentals. Enterprise startups are in a better position. Companies trying to optimise cost and operations will require SaaS products, he says, adding that as investors, we will seek path to profitability rather than just future potential. Sentiment of weak public market is transferred to private markets as well and fundamentals of business will become the guiding point for investors.

Prime Minister Narendra Modi said last week that India has the third largest start-up ecosystem in the world. And that they are turning out to be a powerful vehicle to fulfill the dreams of the common Indian youth. But going forward, given the economic condition of the world, the start-ups need to work on their fundamentals and plan ahead by optimizing their cost, as fundraising will be difficult in the days to come.