Is this a course correction, or the outcome of last year’s demonetisation and new changes to the tax regime? Experts speak up

There was a gold rush in the Indian startup ecosystem in 2015-16, with VCs vigorously queuing up to invest in new ventures, particularly in the foodtech and logistics verticals. The madness was based on a misconstrued notion that the Indian startup market was ripe for disruption.

Sniffing an opportunity for easy money, many first-time entrepreneurs took the plunge and launched consumer-focused internet startups, especially in foodtech and on-demand delivery, but with hardly any clear differentiator to boast of.

Worse, VCs — under pressure from LPs to deploy capital — could not separate wheat from chaff, or didn’t bother to do so. Startups were burning cash for consumer acquisition, marketing and expansion. But revenues did not grow in proportion and the unit economics did not make any sense.

Also Read: How religion, caste and superstition affect the foodtech space in India

The result was an implosion. Seeing no light at the end of the tunnel, VCs put a halt to their unreasonable investment spree. Many high-profile VCs pulled out of the market, and the lack of financing saw many more startups vanishing. The tech startup scene was heading for a slow-down, and the end result was a huge decline in the number of startup launch.

As per data released by startup tracking platform Tracxn, India produced around 800 startups in 2017 to date, compared with more than 6,000 in the whole of 2016. Tracxn finds out that the huge number of startup shutdowns, struggles of large startups such as Snapdeal and a slowdown in e-commerce growth took a toll on the entrepreneurial activity in India.

But is this a worrying signal? It is not — at least for the industry veterans e27 spoke to for this story.

According to K Vaitheeswaran, a veteran entrepreneur and Co-founder of India’s first e-commerce company Fabmart, it is a course correction and this was very badly needed:

“The madness of 2015 and 2016 was driven up by investors by investing huge funds into startups that years after burning through the cash are still not going anywhere. The only metrics discussed and debated were funding and valuation and the higher the numbers, the more ‘robust’ the startup. This created an environment where thousands of Indians felt that starting up is so easy and all they had to do was announce some cock-eyed idea and instantly they would be able to raise millions of dollars at insane valuations, become unicorns and within a few years they could also become investors,” he reasons.

“The funding winter in late 2016 has brought some semblance of correction into the system. Entrepreneurs are suddenly learning to spell P-R-O-F-I-T-A-B-I-L-I-T-Y while investors are practicing S-U-S-T-A-I-N-A-B-I-L-I-T-Y. Another factor is that investors made huge bets on Indian startups hoping to make a killing by selling to global giants when they entered India. That has not happened so far, and so investors are beginning to realise that the India Startup Story may not be as profitable as they expected. Hence they are tighter with their funding,” he goes on.

Vaitheeswaran, who recently penned a book titled Failing to Succeed – the story of India’s first e-commerce company, the spectacular imploding of unicorns like Snapdeal and Housing has added another layer. “Investors suddenly understand that ‘forget returns’, their investments may actually crash and burn. Instead of madly pushing up valuations, investors are seriously evaluating whether the startup is likely to make money anytime in future and the answer in most cases is No. They are not supporting such ventures.”

Also Read: Will Amazon still emerge in the lead even if Flipkart, Snapdeal, and Paytm team up?

Indeed, the decline in the startup activities manifested in first half of 2016 itself. While there were around 11,465 startup launches in 2015, the figure nearly halved in 2016 to 6,282. The number of deals also saw a considerable drop — from 1,176 in 2016 to just 648 in 2017.

“I think it is a course correction, and there is no better way to describe it,” shares Sanjay Nath, Managing Partner at Blume Ventures, an active early-stage fund in India. “In the last couple of years, in 2015 and 2016, we had a bit of over-investment, especially in foodtech and logistics. The tough part is that there were lots of shutdowns and the good news is that only serious people are now becoming entrepreneurs.”

Additionally, Nath observes, it is a bit of quality of over quantity. “Now, we have unicorn founders coming out to build startups and we have companies raising larger rounds. We are entering a rationalisation period. It is actually healthy. Now is very good time for good entrepreneurs to start companies. VCs are taking the time. They are all investing with more scrutiny, and good news is that all VCs have even more money.”

Nitin Sharma, former Principal at Lightbox Ventures who recently turned angel investor, is neither surprised nor worried at the turn of events in the Indian startup scene. “Focusing on the sheer number of startups created isn’t necessarily helpful for the Indian ecosystem. More than x or y thousand startups, there’s first a need for a few large outcomes with scale and differentiation.”

“When you have an artificially high rate of startup creation (vs. depth in the market), it usually comes with too many copycat ideas or folks who get sucked into the craze and turn founders without the right mindset or skills. That doesn’t help anyone. Hyper-competition hurts economics of the businesses. Founders spend more time fighting competition and worrying about capital vs. solving the customer problem. Talent gets spread across too many startups. It becomes harder to build stable, quality teams. It’s also probably a good idea for the vast majority of employees to first work in a startup for a few years before going out on their own,” he points out.

Sharma is of a view that the slump is probably due to a perception and lower risk appetite. “Would-be founders not jumping in because of perceived problems with raising capital, or the case studies of famous failures and startups generally not working out as well as previously imagined.”

Robin Alex Panicker, a serial entrepreneur and angel investor, fathoms that the slow-down is a good sign. “Drop in the number of new startups this year is a good sign. What this means is that the market is seeing more experienced people starting up, and more serious and more socially-relevant problems are being attacked. Moreover, the cool factor that got associated with startups has evaporated. This is an opportunity for the Indian startup ecosystem to reset,” he tells e27.

What could be the possible reasons for the decline?

“Some of the possible reasons are that one, raising funds at a very early stage has equal or less probability than winning state lottery has contributed to the current scenario; and two, easy money is gone. Third reason could be that the general economic situation and entrepreneurial confidence post-demonetisation in November last year and the roll-out of Goods and Services Tax early this year could be other reasons,” he remarks.

Furthermore, according to Vaitheeswaran, people is another key factor for the slump. “Thousands of employees were fired from multi-storied startups, which until a year ago were seen as the future of India’s economy. The bad press surrounding many such firings and the way employees have been abused and mistreated means people are not as excited about joining startups as they were two years back and prefer the security of employment in large companies.”

But Vaitheeswaran is quick to add that all this is a temporary phenomenon. “I have seen enough cycles, and I know that such lessons are forgotten quickly. One exit somewhere and a fresh set of investors armed with huge chests will land up, invest millions into thousands of startups and things will be back to normal. G-M-V is after all a much easier word to spell any day,” he chuckles.

Like in any other industry, the market itself is taking some corrective measures to make sure only the fittest survives. VCs are also becoming more prudent, and the period of FOMO and the gold rush have passed. Young Turks are also fast realising that entrepreneurship is not child’s play.

 “Entrepreneurship is a hard long journey and people who start up must prepare for this when they start. It makes the overall ecosystem more robust and durable and through such a system I have no doubt some great winners will emerge,” Vaitheeswaran concludes.

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