Startups feel the pinch as funding slows down

While the sentiment looks upbeat for startups in India, appearances are being truly deceptive.

The recent Economic Survey 2015-16, tabled by Finance Minister Arun Jaitley in Parliament said the startup sector in the country is witnessing "unusual dynamism", focused on e-commerce and financial services. "Indian startups have raised $3.5 billion in funding in the first half of 2015 and the number of active investors in India has increased from 220 in 2014 to 490 in 2015," the survey noted.
It added about 2,000 startups have been backed by venture capital/angel investors since 2010, of which 1,005 were created in 2015 alone. The survey said there were 19,400 technology-enabled startups in India as of January, out of which 5,000 had been started in 2015 alone. India is also the home-ground for eight startups in the 'Unicorn Club' with valuations greater than $1 billion (as of December 2015).

While the sentiment looks upbeat for startups in India, appearances are being truly deceptive. Research firm VCCEdge found that angel deals have dipped to 115 from 133, while Series-A transactions have plunged to 14 from 66 so far this year from the previous one, reports The Times of India. In the same report, Sudhir Sethi, chairman of active venture firm IDG Ventures said that the sentiment was cautious, referring to the comparison with last year's investments in startups which were going through multiple rounds of capital within a matter of months.

The Wall Street Journal reports how executives at tech startups say investors are becoming more discerning and iron fisted and expecting a stronger focus on profitability."The ebb in cash is part of a global reassessment of investor appetite for tech startups from Silicon Valley to China. It marks a sharp reversal from earlier last year, when funds were falling over each other to give money to Indian entrepreneurs," says the report.

The report also refers to the trend where investors were happy as long as the startups outdid competition but that has slowly changed too. Even the bigger, and slightly more stable, ecommerce ventures like Flipkart, Snapdeal and Amazon India are struggling everyday to break the conundrum of offering deep discounts in a bid to achieve profitability. "The cost metrics only make sense if I can double profit margins by cutting costs and boosting revenue with a combination of larger orders and less discounting," says Navneet Singh, Chief Executive of PepperTap - the grocery delivery startup, in the Wall Street Journal.

A report by Bloomberg calls the fundraising party winding down a 'market detox'. The report sees this as a good sign because this will separate the men from the boys. "The global market is seeing several flat or down rounds. There is no doubt that there will be more discussions and pressure around valuation of Indian startups, given what Morgan Stanley recently did,” said Ash Lilani, co-founder and managing partner of venture firm Saama Capital to Bloomberg. “Only the strongest will survive. The weak -- those who do not have a solid business model but still managed to raise money -- will wither away,” he said. “The companies with the right model, the leaders in the pack will continue to raise money but at realistic levels.”

This might really mean a reality check for the startup boom -- and entrepreneurs might make that move to consolidation. Some signs of consolidation are already evident in the highly competitive market.
Grofers, a “hyperlocal” grocery app that allows customers to order goods from corner shops online, last month made two acquisitions in a week, taking over its shuttered competitor Townrush and meal delivery service SpoonJoy. And earlier this month Mumbai-based CarTrade, a portal for selling used autos, acquired its rival CarWale for an undisclosed sum.

Huge rounds of layoffs, too, paint a grim picture for the startup scene in India. Restaurant search website Zomato, food delivery app TinyOwl, property portal -- all prominent players in the market went through rounds of layoffs.

“Investors are not looking objectively at the sector. They are just seeing a few success stories and ignoring the failures, just like they did in the dot-com era,” said Paras Adenwala, investment consultant at Capital Portfolio Advisors in Mumbai.

Adenwala is concerned that once the United States’ central bank starts moving on interest rates, as it has long been tipped to do, investors will be less generous with their cash, making the situation worse.
“You will see a lot of these start-ups falling by the wayside once the US Federal Reserve starts raising rates and funding dries up,” he said.
With input from agencies

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