Startup Ecosystem in India

In News

• Recently, the startup ecosystem in India has started bracing itself for a long and bitter winter.

About

• Reason: With funding starting to dry up due to global macro-economic factors and potential mass lay-offs in the next 12-18 months, particularly in sectors such as ed-tech and gaming that got a significant push during the pandemic. One more reason was the lock down in China that has led to risk averseness amongst investors. 
• Funding: In the April-June quarter (2022), start-up funding fell by about 40% to about 6-7 billion. Prior to this, start-ups were seeing investments of about USD 10-11 billion per quarter.
• The three main areas of costs for start ups where cost-cutting is being looked at are:
  • People, 
  • Technology and infra, and 
  • Marketing.
• Result: As start-ups look to extend the runway with existing funds, job losses across start-ups have been making headlines. 
• Rise in Start- ups was due to: 
  • India’s strong digital boom
  • Relative ease of funding
  • An intent to ramp-up growth through new offerings – including products and solutions.
  • Government’s intent for the same with Programs like Startup India.

Image Courtesy: TH

Startups in India

• Startup India Initiative: Since the launch of the initiative in January 2016, more than 69,000 startups have been recognized in the country till May2022.
• Sectors: They were launched across 56 diverse sectors, including:
  • 13% from IT services, 
  • 9% from health and life sciences, 
  • 7% from education, 
  • 5% from professional and commercial services, 
  • 5% from agriculture, and 
  • 5% food and beverage. 
• Government Data: As per data from the Ministry of Commerce and Industry, the number of people employed in start-ups covered under the Start-up India initiative stood at about 1.74 lakh in 2021.

Challenges in Fund Raising

• Post COVID situations: Sectors which got a huge natural push during the pandemic such as ed-tech and gaming, their growth has now plateaued, and they are in more trouble. 
• No funding in the last 2 years: There are startups which have not raised capital in the last two years. Irrespective of which sector they operate in, they will also face challenges in raising funds.
• Global policy changes: The global slowdown and tightening monetary conditions will likely add to investors’ uncertainty and the situation may not improve till the US economy revives. 
• Business model failure: A lot of the slowdown is happening in places where an experiment has failed or the business model itself wasn’t ready for the scale. Start-ups continuously experiment and it is only natural to see some of this play out
• Forced mergers and acquisitions and other issues: The Indian start-up ecosystem may succumb to a sharp correction in valuations and a decrease in venture capitalist funding for the next one year, especially for first-time entrepreneurs. 
• Governance issues: Amid all this mergers and acquisitions and buy-outs etc, governance issues in start-ups will play an important role.

Stability in Future

• Global investors state that there is limited visibility on when things will stabilise due to factors:
  • Overall macroeconomic scenario, 
  • Inflationary pressures, 
  • War and fall in the stock markets, 
  • Supply chain disruptions, 
  • Rising cost of capital. 
• However, India-focused start-ups may have a better value and revival will be higher in the days to come as India is expected to bounce back shortly.
• Layoffs, while high in isolation and very unfortunate, are minuscule as compared to the total number of employees in this sector and largely restricted to non-critical areas such as customer support, operations, etc. 
• A similar trend was seen in 2016-17 too as start-ups back then in a similar scenario started focusing on productivity and cost reduction measures.
• Mergers and Acquisitions may also help stronger companies and genuine start-ups with a better product to emerge from the crisis.
• Consolidation is likely to take place in certain sectors like technology/fintech and healthcare as established companies may use this situation to their advantage for buy-outs of start-ups

Conclusion

• Those Indian start-ups that are focused squarely on their mission, remain lean, and avoid frills, will be able to tide through these tough times, and potentially bask in the sun again. 
• However, as a country, India is a long way off from a course correction for the better in the immediate short-term.
• There will be a slowdown in the sector only if the current scenario turns into a prolonged slow down.

Source: TH