Jiten was happy when he was offered a fourfold hike in salary to join one of India's fastest growing startup as a product engineer.
He said that demand for engineers had skyrocketed in 2021, and new companies were offering crazy packages as they looked to expand.
I had a discussion with my family aboutSharma joining the company. He wanted me to join an established company for the sake of job security, but I told him that the company had recently raised a lot of money. I was able to convince him that my job was safe there.
A startup that was called Soonicorn and was valued between $500 million and $900 million would sack him along with hundreds of others in eight months.
I think dad was correct. I haven't gathered courage to talk to him about this since I was laid off.
There are thousands of layoffs.
Thousands of people have been sacked by well-funded startups since the beginning of the year. According to data compiled by Moneycontrol, over 5,000 employees have been fired by startups this year.
More heads to roll this year as startups look to cut costs. He said that the laid-off employees would be able to get a job soon as he believes that India has always had a talent crunch.
Employees should be aware that if a startup is raising funds so aggressively, they are also burning cash aggressively. Lunia said that while you celebrated great hikes last year, the biggest spenders were going to be the first to cut costs.
After a blockbuster funding party that lasted for nearly two years, startups have gone on a hiring freeze, rationalised marketing and advertising spends, and shut down non-core verticals, as they enter a bleak period.
Think about it from a company's perspective. Many companies will die if they don't reduce the burn. Lunia said that they have to cut all kinds of costs because funding has slowed down.
There is a funding crunch.
A spike in inflation and a hike in interest rates have had a negative effect on startup funding, as investors cut down on investments to public and private markets. Supply chains have been impacted by lock downs. Fuel prices and transport costs have gone up because of the Russia-Ukraine war. The sentiment has turned bleak, a stark contrast to the euphoria of the year 2021.
According to data shared by CB Insights, venture funding to India-based startups dropped to $3.6 billion in the second quarter of 2022, from $8 billion in the first quarter of the year and over $10 billion a year ago. In the first quarter of this year, venture funding slowed for the first time since the October-December quarter of 2020.
Private equity and venture capital firms had intense competition over the last two years, due to the abundant liquidity in the system and rapid adoption of technology, which led them to deploy billions in tech startups, according to an investment banker requesting anonymity.
They made some losses through IPOs or down rounds and have taken a backseat now. Larger rounds will be led by pension funds this year, as they need clarity on business models of high-cash-burn companies, and because of that, they need to deploy cash. The banker said that high-burn startups will struggle and that profitable companies with strong unit economics will get this money.
The five largest deals by startups, which account for a fifth of the total venture funding in India, have been led by pension funds and private equity firms.
The top five deals of the year were led by late-stage private equity and venture capital firms.
Most of the investors who can lead rounds of $40 million or more are based outside India. A lot of people invest in a mix of assets. Even if they have funds to deploy, there are many claims to that capital, including public equity and private investments in their home countries.
Many have stopped funding discussions and even signed term sheets. We expect a long period of pain for any growth-stage startup that gets caught with a short runway.
The portfolio companies that have recently raised capital and are looking to raise a growth round next to plan a runway have been advised by Stellaris. Banglani said that an 18-month runway could be adequate for early-stage companies.
For earlier-stage companies, a long runway may be counter-productive because they want to find a market quickly. He said that a runway of 18 months should be adequate.
The willingness to fund the company further if they continue to perform is a commitment we are making to earlier-stage companies.
Multi-stage venture capital firms like New York-based Tiger Global and Japan's SoftBank Group, which have been aggressive investors in Indian startups, have said that they will be going slow this year.
SoftBank, which has been an aggressive investor in India over the last five years, said it will cut its investments to a fourth globally in 2022. Tiger Global said it will back more early stage companies this year. Tiger Global invested in India for the first time this year.
Tech IPOs and hammering in the public markets.
SoftBank and Tiger Global have suffered record losses on their multi-billion dollar venture funds due to an unprecedented slump in valuations of technology companies across the globe.
SoftBank's Vision Fund investment unit posted a loss of over 2.97 trillion dollars for the first quarter of the year, as its portfolio of listed companies took a beating.
South Korea's Coupang Inc and China's Didi Global have plummeted in the January-March quarter. Since its listing price, the shares have fallen as much as 70 percent. According to the company's financials, SoftBank's $8.2 billion investment in Coupang is valued at $2.2 billion.
The parent companies of PolicyBazaar and One97 Communications are trading much lower than their listing prices.
SoftBank's investment in Paytm has a fair value of around $800 million, while the Japanese conglomerate's $400 million investment in the same company has a fair value of $100 million.
Tiger Global said it increased early-stage investments in private companies through its newest and largest venture capital fund of $13 billion. The New York-based hedge fund company told investors earlier this month that more than half of the fund's investments were in Series A or Series B rounds.
Tiger Global's total value of public stock positions fell to $26 billion at the end of the March quarter from over $46 billion in the previous quarter.
The hammering that some of the stocks like Zomato, Policybazaar, and Paytm have received in public markets is making investors wary of exits in the future.
There are plenty of startup that cannot run without money, and they are looking at raising debt or down rounds.
More capital tends to flow to proven revenue and profitability models during down cycles.
This presents an opportunity for early-stage VCs to take bolder bets in companies where the business model is unclear but who can execute with a low burn for an extended period of time. There are opportunities in core technology areas, as well as certain segments in Fintech.
Those companies that rely on high burn for growth and who did not raise enough capital in the previous year will struggle the most. It is difficult to arrest the vicious cycle of cost-cutting, declining business metrics, low investor interest and talent flight once the tide turns.
Delayed fundraises
The investment bankers comments come at a time when many startups have been forced to delay their funding plans.
It will be challenging for those raising funds in the next six months, given the usual aggressive investors penchant for quick decisions over zoom calls, sparse due diligence, and aggressive valuations. Expect more time to close funding rounds, more support and bridge rounds from existing investors and companies trying to conserve cash through cost-cutting strategies.
Entrepreneurs can expect more questions from investors on path to profitability, unit economics, and so start working on these aspects more than how you will conquer the world.
The next funding round is taking an unusual amount of time. Even if they close it, it will be at a lower valuation than they bargained for.
According to souces, SoftBank-backed e commerce firm Meesho mandated Morgan Stanley for its fund raise.
Meesho was looking to raise more capital and Morgan Stanley had some reverse inquiries. A person familiar with the development said that after the market turned south, it didn't make sense to continue with conversations. The person did not reply to the questions.
According to sources, Tiger Global and Insight Partners wanted the company to bring in a new investor to lead its next round as it was struggling to raise a fresh round.
Cut the burn.
According to one of the sources mentioned above, the only thing VCs are saying these days is "cut the burn, cut the burn, cut the burn."
There is still some salary inflation and some startups are not yet smelling coffee. The source said that some of them want to raise $30 million at the seed level.
A person quoted above said that businesses with good metrics will struggle to raise funds because of the market sentiment.
It is amazing how quickly things have changed. Schools are reopening after Ed tech is in deep trouble. Funding will be difficult for Fintech, it is not in that much trouble. Family offices invest in public markets. With their public holdings taking a hit, they are now pulling back from the private market as well.
Indian startups need $10-$15 billion in the next 6 months, but they only have $2-$4 billion available. Most funds are cutting checks for early stages. I expect at least 10,000 job losses, as more startups struggle to raise money, the person said.
There are fewer Unicorns.
There are fewer funding rounds. While it was a founder's market last year, investors are in a dominant position as they seek more equity for a smaller amount.
Moneycontrol's data shows that investors have made only 1 unicorns in April and May this year compared to 15 in the same period last year. There have been many rounds this year at valuations between $800-950 million, showing investors are not willing to pay $1 billion for a startup.
The valuation of the fundraise by the company was $900 million. Ninjacart raised $145 million at a valuation of $815 million.
Last year was an unprecedented year for startups in terms of funds raised and valuations.
It is expected that there will be a reversal as this trend cannot continue year on year as it has in the past in both private and public markets. The fall is not severe after the rise with this type of tempering, and it is good for entire ecosytem.
As the startup party comes to an end, founders now have to prioritize stronger unit economics, less cash burn and rationalized customer acquisition costs. Lunia of India Quotient said that India's startup had gotten used to a 24x7 party and now are facing withdrawal symptoms. I would call it withdrawal symptoms.
Corroborating Lunia’s comments, Ganesh said, “Entrepreneurs are very resilient, the ecosystem has faced this multiple times, I am confident it will come out of this as usual. I don’t see anything more severe or unusual other than given the size and scale of the ecosystem the stakes and numbers are much larger. Till then ride the storm, stay alive.”You can download your money calendar here and keep your dates with your moneybox.
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