While India’s economy is booming, startups are in a state of flux

India’s economy is expanding, but there has been instability in the country’s startup scene.

Even though there are a growing number of startups in the nation, in 2023, there were only two that achieved unicorn status. A privately owned startup firm valued at more than $1 billion is sometimes referred to as a unicorn.

Compared to the 14 firms that achieved unicorn status at the same time in 2022, no new unicorn startups have formed as of March 2024.

The global financing winter is blamed for the financial bottleneck that is reflected in the slowing of unicorn additions. India was also impacted by the startup funding winter that began in early 2023.

Funding difficulties
Formerly enthusiastic about Indian new-age digital businesses, foreign investors are now wary. Their decision was influenced by a number of factors, including recent setbacks suffered by some Indian companies, in addition to the global economic recession.

There has been a change in Blume Ventures’ investing approach, according to managing partner Karthik Reddy, who spoke with news agency Reuters. Blume Ventures is a significant early-stage startup investor. Driven by the need to protect returns in an unpredictable market, they increasingly choose fewer agreements with higher amounts of money rather than distributing funds over several firms.

“When your existing portfolio is not showing gains, it is hard to be excited to do more,” Reddy said.

The world of investing has changed, and today’s investors prioritize possible profits.

The data shows that this shift has occurred, with Indian entrepreneurs collecting just over $900 million in the first few months of 2024—another muted year after a sharp decline in financing in 2023.

Venture intelligence data indicated that in 2023, companies raised $8 billion, the lowest amount in six years. According to a survey released by Bain & Company in association with the Indian Venture and Alternate Capital Association (IVCA), 35,000 companies in the nation were forced to close due to a dearth of capital in the previous year.

In contrast to the record $36 billion in 2021 and even the $24 billion in 2022, the quantity of funds generated is small.

On the other hand, due to economic growth that has surpassed 8%, India’s stock market has risen by 19% since the start of the previous year and reached an all-time high this month.

According to data from CBInsights, investment in Indian startups fell by two-thirds last year, which is a far larger loss than the 36% drop for US companies and the 42% decline for Chinese businesses.

How it affects the rate of economic expansion
There are wider economic ramifications to the decrease in startup investment.

According to a survey by an Indian trade association and McKinsey, startups have made a significant contribution to the job market and economic development of India, creating 20–25% of new employment and 10-15% of economic growth in the last eight years.

Numerous significant startups have let go of thousands of workers in the last few years. A number of startups that made layoff announcements were regarded as industry leaders in their respective fields. Several well-known brands, like Byju’s, Ola Cabs, Paytm, and Zomato, are among these modern businesses.

These choices affect not only the workers but also the general expansion of the economy. Additionally, these choices severely damage investor confidence, discouraging further investments.

Startups that are overvalued
It should be mentioned that since Paytm’s 2021 IPO, its stock price has dropped by 80%, and Byju, which was previously valued at $22 billion, is now only worth $200 million. The company is also having trouble paying its employees. All of its offices, with the exception of its Bengaluru headquarters, were recently abandoned.

In addition, the edtech business and its investors are at odds over a rights issue.

Ola suffered a decline in its value even though there was no crisis. Investor in Ola Cabs Vanguard lowered the company’s value to $1.9 billion, a 74% drop from 2021.

According to Reuters, Ashish Sharma, the CEO of Temasek-backed InnoVen funding, which has invested $1.5 billion in Asian startups, it is clear that certain industries got an excessive amount of funding, which led to an increase in value.

“While some businesses have been fortunate, being fortunate cannot be a business strategy. One shift, according to Sharma, is that we must exercise more caution when assessing high growth/high (cash) burn companies and determine if the assessable market is big enough to attract growth investors in order to raise the necessary funds.

But it seems that luck is running out. Today, venture capital organizations such as Nexus Venture Partners are expanding the scope of their investments outside technology enterprises. This strategy seeks to increase market share while reducing the risks connected to both conventional and new-age economic sectors.

A person cited in the Reuters story said, “SoftBank could not justify those valuations; most (Indian) startups were too richly valued.”

What is ahead for startups in India?
With Japan’s SoftBank potentially investing up to $300 million in India this year, the landscape for Indian entrepreneurs might shift this year. Should it decide to invest, this might spark renewed interest from investors in Indian firms.

Speaking at the Startup Mahakumbh event in New Delhi, Rajan Anandan, Managing Partner of Peak XV Partners, previously Sequoia India, alluded to a reversal in investment.

Projecting that Indian companies might get between $8-12 billion in investment this year, he alluded to a possible recovery from the funding winter. Anandan estimated that $10 billion, or around Rs 80,000 crore, would be sufficient to support the growth of Indian entrepreneurs.