Many entrepreneurs, investors, and tech bankers who came into business over the past few years, haven’t seen a jolt of this kind. I have seen and written about a few down cycles by now — 2012-13, 2016-17, and perhaps 2018-19, all of which were periods of moderate activity. But this current one is likely to keep unfolding for a long time. One is discounting the 2007-08 economic crisis as the big wave of tech entrepreneurship and venture capital happened in the ensuing years in India.
There are supposedly 100 unicorns in India now. Out of these, 40 were born during the go-go year of 2021.Of this cohort, 90% are unlikely to hold on to those out-of-whack valuations. And that’s the scary part for most in the industry. The number of highly valued startups has shot up exponentially in the last 3-4 years. This means the damage will be far sharper and the cuts deeper.
A VC in Mumbai recently told me, ‘While you and I feel we have seen down cycles before, actually we haven’t. The 1999-2000 dot-com bubble was the last comparable period to what’s happening now.’ Which makes everything fall into perspective.
An investment banker pointed out, ‘My team is going through an existential crisis. They cannot wrap their heads around the stillness in the market. It is hard to keep these people motivated after the rush of 2021.’ All of this isn’t much different from what’s happening in the US. It’s just that in India the trickle-down impact is always a bit delayed.
What started eight months ago, with investors asking for profitability, tighter control on costs and unit economics, to layoffs and downsizing, has now turned into a full static mode for the past few months. To add to this, a bunch of companies have seen major corporate governance lapses, highlighting how the excesses of previous years are throwing up concerns about basic business fundamentals.
Funding in startups dropped to about $800 million in February 2023. This is down 85% from 2022, as per Tracxn data. The funding crunch had already set in by this time last year. But official deals data is always running a few months behind.
VCs are spending most of their time on existing portfolio companies with the intention of making their financials look better. In the middle of this, they are holding events and get-togethers, warming up companies to public market investors, as exits seem to be a far-off promise once again. The number of mixers by VCs and marriages of entrepreneurs seems to have shot up in the past few months.
This current landscape underlines how growing exponentially with the help of risk capital, raising back-to-back funding rounds at higher valuations, and frenetic deal activity are so integral to the Indian startup economy. One blip in this trend makes every stakeholder anxious. This further creates a sense of despondency, more so in people who have never been through the tough times.
But why can’t new-age tech businesses run without the noise, grow predictably, without the exuberance surrounding this sector? One year of slower activity pulls down everyone to extreme pessimism. That’s because tech is emblematic of high growth, rich valuations and hyperactivity, and a lot hinges on the external narratives built around these companies by investors, founders and even employees.
In times like these, the same set of people glorify the importance of profitability and of sound unit economics. But a year down the line, when markets will rebound, they will sing another tune. The real reset won’t happen until and unless VC-backed businesses start prizing these metrics to value companies with or without a downturn. Then, we can hopefully say in the next cycle, ‘This time it’s different.’
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