Till some time back, start ups were the new cool kids on the block. The first benchers of classes were heard speaking of startups if they didn’t make it to IAS, Investment banking, Premier B School MBAs etc. All cool! India needs more innovative entrepreneurs. After a sustained and long enough span of funding frenzy, investor enthusiasm for the country’s tech startups has fallen sharply this year. Weaker firms are laying off employees and some have closed up shop altogether. Already, the downturn has claimed some high-profile victims.
Peppertap, a grocery delivery app financed by Sequoia Capital and Snapdeal, shuttered its delivery operations and “pivoted” to logistics. Another funded grocery delivery startup, Grofers, shut its operations in nine cities across India. Recently, TinyOwl laid off around three hundred employees in Mumbai, which led to large-scale protests since their severance packages had not been paid off. Housing.com too reportedly fired about six hundred employees, and the “unicorn” startup Zomato reportedly fired 10% of its staff globally.
Startup funding in the second quarter plummeted to $583 million from its recent peak of nearly $3 billion in late 2015, according to CB Insights. It’s a sharp turnaround for a sector that attracted more than $8 billion last year.
With the large population base and an equally high surplus of skilled IT workers, Indian startups proved irresistible to many investors. The success of homegrown e-commerce darlings Snapdeal and Flipkart, and ride-sharing app Ola, added credibility. Yet there is a simple explanation for the reversal: similar to the one that rocked Silicon Valley when it burst in 1999.
Most Indian startups are either e-commerce oriented or tech related. We all know what happened with Foodpanda. What is the flip side to buying Flipkart? Or probably why Snapdeal also looks shaky? All these e-commerce sites swayed away from the basic concept of “Earning Profit” and started concentrating instead on increasing the user base and customers. For this they spent more on marketing than they earned.
This is a vicious cycle and it is never going to stop, with increase in users there will be money rolling but, there won’t be profits.
Most startups we see in India, are a copy-paste version. Despite billions being invested in, most startups are not profitable. Yes, India is a consumer driven economy, but how long are the start ups just going to be mere copycats? They have to innovate, customize to suit the country’s needs and they have to be edgy for the investors to be interested in them. Think, why do we all love Facebook, Whatsapp, or Google? Because they were innovative, they addressed the needs when nobody did.
Over valued startups:
Most startups are overvalued. Why do you think Flipkart raised only USD 550 million, when it was valued at USD 16 billion, Snapdeal, which was valued at USD 5 billion, raised a mere USD 500 million investment. So, analysis of the business model is very important before being confident and trying to raise money in the market. Thus, most companies sugar coat their valuations and present it to the investors to attract fresh investment.
Who Has The Patience:
Most investors in India lack patience. Everyone looks for quick money, and if there are some losses the investors will suck the juice out of you and make sure your fall is accelerated. Hence, startups, should be aware and stay away from these investors. These days, in order to diversify investors, invest in varied avenues. However, they do not have much idea about the operating model of that business. Thus, investors are of no value addition, other than their money, which they will withdraw or threaten you to withdraw, when you go through hard times.
Only Substance Will Sustain
If this bubble goes bust, there will be a lot of people who will lose money. But, there is a silver lining for companies with real substance, they will give returns and survive the downfall. So, if you are a startup investor who has invested in a company that is fast growing and making money, but lacks substance, innovation, and profitability. “Exit and have your plan B in place.“