Digital disrupted
The startup environ
is surely struggling,
moving from one
stage to another.
While analysts hope
that it is maturing,
those within are
confident that this is just a business cycle
Abeer Kapoor
When e-commerce giant Flipkarts valuation dropped dramatically by 27 percent from $15 billion to $11 billion in March this year, it sent shockwaves through the entire Indian startup ecosystem. Since then not just has its valuation plummeted further, but so have the reputation and credibility of the much-vaunted digital India on whom the fortunes of the countrys economic growth were riding. Is the disruption ephemeral or long-term? On this important question ride billions of dollars of investment, and the hopes of thousands of young, first-generation entrepreneurs and workers.There are no easy answers.
Flipkart is one of the brightest stars of the Indian startup scene. Once the poster boy of the young, defiant entrepreneurial spirit in India, it changed the reluctance of the Indian consumer to shop online, and in the process became a verb: Ill flipkart it. Since its stratospheric drop in market valuation, a million problems have come to light and rumours about the company have spread like wildfire. The biggest public relations debacle for Flipkart erupted in May, when the joining date of several campus recruits from the prestigious Indian Institute of Management Ahmedabad (IIM-A) was postponed. The companys communications team stated that this was due to a routine restructuring process. Many, however, believed that amidst a funding crunch the company was ill-equipped to take expensive campus hires on board. The decision was not without its consequences, though. Many engineering and business schools have actively considered blacklisting Flipkart, and some have gone ahead and demoted it from day zero of placements. Even before the image of the company in the public eye could recover from the bad press, there is news that close to 700-1000 employees whose performance has not improved, despite having been put on notice, will be either asked to resign or be handed a pink slip and severance pay. With this news the cat has metaphorically been set amongst the pigeons, who in this case happen to be the employees of and investors in the organisation.
Its not just Flipkart that is haemorrhaging. In fact, the year 2016 has not brought good tidings for many big-ticket startups. Snapdeal, which snapped up $860 million in funding in 2014 (including investment from Jack Mas Alibaba group), has had to tighten its belt of late. The company has held talks with several new investors who have refused to invest at its current valuation of $6.5 billion. It may eventually be forced to go for a down round, where investors purchase stocks at a lower valuation.
Zomatos market valuation was also slashed, almost by half, by HSBC. In 2014 the food-tech startup had been valued at $1 billion and as a result had acquired unicorn status.
Within the first half of 2016 eighteen startups have shut down, as compared to 14 in all of 2015. The amount invested has fallen dramatically; the second quarter of 2016 which are the months of April, May, and June has seen a 59% decrease in investment when compared to the same quarter last year.
It was in 2014 that companies such as Paytm and Flipkart were valued as unicorns. A 20 percent increase in the number of ventures that found funding led to a 400 percent increase in the amount of money that was pumped into the market, taking that amount to a never before seen amount of $5.1 billion. 2015 broke that, by nearly doubling it; $9 billion entered the economy through new entrepreneurs and their technology-based companies. No one could deny that something that resembled a revolution was taking place in India.
Companies received large amounts of funding, and the number of new ventures per annum dramatically increased from 480 in 2011 to a little over 800 in 2015, pushing the total number of tech-based startups to somewhere near 4,200. In numbers, the compound annual growth rate (CAGR) of the startup market has increased at a rate of 75 percent; the ecommerce industry alone had registered at 35 percent. To compare, the entertainment and movie industry is growing at a rate of 10 percent, while the infrastructure industry at 6.5 percent. In actual value of investment brought in to the economy, the growth rate of these new ventures is slightly above 80 percent.
The Indian startup environment is one of the most exciting places for investment globally, according to a report released in January this year by Grant Thornton, a leading advisory firm. The vastness of it large consumer spending and the belief that still large swathes remain untapped promises returns far greater than the amount invested. Many international companies, including investment funds like the US-based Tiger Global and German-based Rocket Internet, have invested in Indian companies and hunger for a bite of the market.
There was a dramatic increase in the number of companies funded in 2015. While growth in funding increased from $13 million to $1,818 million in the four years between 2010 and 2014, in 2015 the amount of investment skyrocketed in cities like the National Capital Region, which registered a 93% increase in funding between 2014 and 2015. The number of investing firms in India grew from 290 to 490 in a year. New Delhi, Bengaluru, and Mumbai thrived; in fact, Bangalore, the southern city commonly referred to as the Silicon Valley of India, has been included in lists of the top 20 destinations all over the world for startups.
Projected growth rates predict that India will have 11,500 tech startups by 2020, while 10,000 already exist. The average age of entrepreneurs in the country is 28, which is much lower than in many other parts of the world. There have been promise and excitement, and easy money and ideas available to companies. Newer sectors had emerged as well: health tech, finance-tech and hyperlocal had become words that every graduate understood. Then came the fall.
What worries analysts is the dramatic turnaround that 2016 has brought. In the blink of an eye the exuberance and prosperity from last year have vanished. The easy money that was available for startups is disappearing. While the number of startups funded is almost the same, if not higher than last year, there is a dramatic fall in the amount of money promised.
Hardnews
