Does More Trouble Lie Ahead For Indian Startups? 

When Jabong, the Indian fashion etailer backed by German Internet conglomerate Rocket Internet, was acquired in July, it was an expected move. Founded in 2012, Jabong was on the block for over a year. Wooed by suitors like Snapdeal, Aditya Birla Group and Future Group, it was finally snapped up by Myntra, the country’s leading fashion etailer and a subsidiary of Flipkart, India’s biggest etailer.

What did make news, however, was the price at which Jabong was acquired. At $70 million it was way below the expected figure of $250 million to $300 million. At its peak a couple of years ago, when it was negotiating with Amazon, Jabong had a price tag of $1.2 billion. Industry experts say that a weak business model, inefficient execution, senior level churn, loss of market share and most importantly, investors’ refusal to pour in more money, all led to a once-bright star losing its sheen.

Jabong’s trajectory is pretty much indicative of the turmoil gathering pace amongst Indian startups. Devaluations, shutdowns, mergers & acquisitions, layoffs and funding crunches have been rampant in recent months. “Many venture funds pushed companies to become unicorns ($1 billion valuation) just because they wanted bragging rights. In some sectors valuation went ahead of value creation. Now there is a catch up happening,” says T. V. Mohandas Pai, chairman of venture capital fund Aarin Capital Partners.

  1. Ganesh, serial entrepreneur, partner at entrepreneurship platform Growthstory.in and chairman of Portea Medical, points out that in 2014 and 2015, for the first time several new investors like global hedge funds and late-stage private equity (PE) funds started playing in the Indian venture capital (VC) ecosystem. Not only did a lot more money come in, these investors were also valuation insensitive. As a result, startups could raise more money at higher valuations than normal and the subsequent funding rounds were being done much faster and quicker.

“Many venture funds pushed companies to become unicorns just because they wanted bragging rights.” –T.V. Mohandas Pai

Indian Startups
Image source: Wikimedia Commons

“This was a temporary aberration and now normalcy has been restored,” says Ganesh. “Investors have started stressing more on profitability, path to profitability, unit economics and basic business model defensibility as against growth, GMV (gross merchandise value), market share, etc. In the current environment, the bar to raise money has changed; a lot more questions have to be answered and a lot more proof of concept needs to be demonstrated.”

Take Flipkart itself. Founded in 2007, Flipkart has raised around $3.2 billion till now from investors such as Tiger Global, DST Global, T. Rowe Price and others. When it last raised funds in 2015 the company was valued at $15.2 billion. Since then its valuation has seen a downswing and is currently at around $10 billion. In May 2016, HSBC’s brokerage arm HSBC Securities and Capital Markets slashed food delivery and discovery startup Zomato’s valuation by half to $500 million. Etailer Snapdeal, which was earlier valued at $6.5 billion, is also reported to be struggling to raise fresh funds at this level. The market buzz is that Flipkart, Snapdeal and Zomato along with some others are prime candidates for acquisitions by global majors wanting to make their mark in India.

Venture Intelligence, a leading provider of data on private company financials, transactions and valuations, notes while from April 2014 to March 2016 there were around 29 acquisitions in the Indian tech startup space, from April this year to mid-August the number has shot up to around 40. Venture Intelligence also notes that in 2015, 16 VC-funded startups shut shop during the course of the year. In 2016, from January to July itself an equal number of startups have already folded up. These include Fashionara, PepperTap, Zippon and Murmur. Post July, shutdowns include Exclusively, a fashion portal which was acquired by Snapdeal last year, TaxiForSure which was acquired by cab-hailing app Ola last year, and online market place and classified portal Askme.com.

“Many startups in India are facing multiple challenges at present. These include both early-stage as well as mid-stage startups and are companies that have either reached the ceiling of their current business model or are unable to raise funds,” says Sreedhar Prasad, partner – business consulting at KPMG India. He points out that these are “classic cases” of companies with “weak business models that are dependent only on funds” to grow. “They all seem to be reaching a stage where acquisition is the only option,” he adds.

Anjan M.K., engagement lead at Zinnov Management Consulting, notes: “Running a startup is like performing a Produnova (a complicated gymnastic move). This downturn is probably the first somersault of the act and we might have another one in a few years’ time. Some could break their necks while others might just land safe. Few would go on to win.”

Anjan suggests that while there will be a cash crunch for startups in certain sectors, “those with sustainable business models and deep tech at their core” should continue to do well. He adds: “While the past few years were all about growth and customer acquisition, we believe that the next few years will be about profitability – especially in sectors where a lot of capital has been invested.”

Losing the Sparkle

Senior level churn has also been making news. Mukesh Bansal, cofounder of Myntra and head of commerce at Flipkart (after it acquired Myntra in 2014) quit in February this year. He was followed by Flipkart’s chief business officer Ankit Nagori, chief product officer Punit Soni and legal head Rajinder Sharma. At Myntra, the exits include head of commerce Prasad Kompalli, head of fashion brands Abhishek Verma, chief creative officer Gautam Kotamraju and finance head Prabhakar Sunder. At Snapdeal, chief product officer Anand Chandrasekaran, senior vice president of marketing Srinivas Murthy, and head of strategy Ranjan Kant. At Zomato, chief product officers Tanmay Saksena and Namita Gupta. At InMobi, senior vice president Samuel John, finance head Manish Dugar, vice president of engineering Naresh Agarwal, head of strategy Khushboo Gupta and vice president-finance Ravikiran Vadapally. The list goes on.

Many of these executives came from established Indian firms and multinationals to partake in the Indian startup story. While some have moved to other startups, others have simply moved out suggesting a lack of confidence in the startup ecosystem.

This has also been the period of freeze in pay hikes and jumps in pink slips. In August, Ola, which counts Japan’s SoftBank Group as a major investor, shut down TaxiForSure, which it had acquired last year for $200 million, and showed 700 employees the door. Flipkart recently laid off around 1,000 people as part of its cost cutting exercise. Others who have let go of people over the past few months include Snapdeal, Zomato, food ordering service Food Panda, local services marketplace LocalOye and online house rental startup Grabhouse.

Kris Lakshmikanth, founder, CEO and managing director of executive search firm HeadHunters India, notes that earlier, thanks to free flow of funds and a massive rush to show growth, startups were over hiring at inflated salaries. People shifted easily from one startup to another at an average of 60% increase in their salary package. Top performers

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