Startups in India gear up for a ‘long and bitter winter’

With funding drying up due to global macro-economic factors, the startup ecosystem in India is poised for a “long and bitter winter” and potentially large-scale layoffs in the next 12-18 months, especially in sectors like Ed. -Tech and gaming which according to experts got a significant push during the pandemic.

In the last quarter (April-June), start-up funding fell by almost 40% to around ₹6-7 billion, said Amit Navka, Partner, Deals and Startup Leader, PwC India, before adding that, earlier, start-ups per quarter stood at around Rs. Were looking at an investment of USD 10-11 billion.

“When we are talking to investors globally, there is limited visibility on when things will stabilize due to factors such as the overall macroeconomic outlook, inflationary pressures, wars and a slump in stock markets. While no one really knows, everyone is preparing themselves for a year of low funding. Given all this, start-ups are conserving cash,” he said.

As start-ups look to extend the runway with existing funds, job losses in start-ups are making headlines. Industry estimates put the total job losses in startups at over 10,000 so far this year.

“After a long period of sunshine, Indian startups are now waking up to a potentially long, bitter and cold winter. Other factors, including the Russia-Ukraine conflict, supply chain disruptions, resultant inflationary pressures, and rising cost of capital, have gotten us here. As funding crunched, layoffs were imminent,” explained Prabhu Ram, Head of Industry Intelligence Group at CyberMedia Research Hindu,

He said that over the years, India’s strong digital boom as well as relative ease of funding fueled the rise of Indian start-ups, and with the intention of accelerating growth through new offerings, including products and solutions, they went to one. Rapid expansion of our product and technical teams.

Fund raising challenges

“Sectors that got a big natural push during the pandemic, such as ad-tech and gaming, have now stalled, and are in more trouble. Similarly, there are startups that have not raised capital in the last two years… Irrespective of the sector they operate in, they will also face challenges in raising funds,” said Mr. Navka, explaining the three main areas of cost. Startups are people, technology and infrastructure, and marketing; cost-cutting is being considered in all three sectors.

According to KR Sekar, Partner, Deloitte India, the scenario of slowdown in start-up valuations, dried-up funding and massive job losses may continue for the next 12-18 months. The global slowdown and tighter monetary conditions may add to investor uncertainty and the situation may not improve until the US economy revives. However, he added that India-centric start-ups may have a better value and the revival will be more in the coming days as India is expected to make a comeback soon.

Jang Bahadur Singh, Director, Industry Lead – Technology, Human Capital Solutions, AON, said a lot of slowdowns are happening in places where an experiment has failed or the business model itself was not ready to scale. He added that start-ups are constantly experimenting and it is natural to see some of these out. Mr Singh said today there are over 500 start-ups that can be classified into late or pre-IPOs, and less than 10% of them have gone ahead with layoffs. “The layoffs, while high in isolation and very unfortunate, are much smaller than the total number of employees in the sector and are largely limited to non-critical areas such as customer support, operations, etc. We saw a similar trend in 2016. Hai-17 also started focusing on productivity and cost reduction measures in a similar scenario as far back as start-ups,” he said.

Buy-out, Merger, Governance Issues

According to InvestIndia, since the launch of the Startup India initiative in January 2016, over 69,000 startups have been recognized in the country till May this year, with 13% from IT services, 9% from health and life sciences in 56 diverse sectors. Are included. , 7% from education, 5% from vocational and vocational services, 5% from agriculture, and 5% from food and beverages. According to data from the Ministry of Commerce and Industry, the number of people employed in start-ups covered under the Start-up India initiative stood at around 1.74 lakh in 2021, Mr. Sekar said.

Mr Sekar said the Indian start-up ecosystem could bow for the next one year due to sharp improvement in valuations, forced mergers and acquisitions, and reduction in venture capitalist funding, especially for first time entrepreneurs. However, he added that it can help strong companies and genuine start-ups emerge from the crisis with better products. “Also, there is potential for consolidation in some sectors such as technology/fintech and healthcare as established companies can use this situation to their advantage to purchase start-ups,” Mr. Sekar said.

Echoing similar views, Mr Navka said that if start-ups are not able to raise funds, many may put themselves up for sale, and large firms that missed out on earlier opportunities, such a start Will be eager to take equity in -UPS. He also said that in the midst of all this, issues of governance in start-ups will also come into focus.

On the reasons for the slowdown in funding, Mr. Sekar said this is largely due to geopolitical tensions between Russia and Ukraine, as well as the turbulent financial market situation due to the lock down in China, raising risks among investors. has been born. In addition, central banks around the world are raising interest rates to prevent excessive liquidity in the economy, which is squeezing money for start-ups. “There is also fear of a recession in the US and other advanced economies, which has dried up funding for start-ups, and the fear of recession has put pressure on prices and sales,” he said.

Going forward, Mr. Ram said, Indian start-ups who are fully focused on their mission, stay slim, and avoid the frills, will be able to tide over these tough times, and potentially get sunshine again. Will enjoy “However, we are far from a course correction for the better in the immediate short term. I expect more improvement – ​​in terms of layoffs and funding squeezes in tech.”

AON’s Mr. Singh said that in his client base, the broad sentiment is one of cautious optimism, and with most venture capital funds tightening wallets, most clients say there are no immediate concerns with most firms being safe. Is. Funding line at least for the next 2-3 quarters. “We will see a slowdown in this sector only if the current scenario slows down for a long time… We have seen some slowdown in recruitment demand… Interestingly, we have seen the numbers go up from 25% to 29% in 2021. In 2022, as employees move back to more traditional organizations for job security,” he said.