Analysis: Zombie Unicorns – Indian Startups Transition from Feast to Famine
Meesho, an Indian e-commerce competitor to retail giant Amazon, experienced a significant surge in valuation last year, reaching $5 billion. This increase in valuation was driven by substantial investments from prominent investors such as SoftBank and Fidelity, who injected hundreds of millions of dollars into the company. These investors sought to capitalize on the thriving ecosystem of Indian tech startups, which collectively raised a record-breaking $35 billion in funding during 2021.
However, the favorable market conditions that fueled this growth have shifted, and concerns about corporate governance have emerged as a significant consideration for investors. The uncertainties in global markets have added further challenges for investors, raising caution and prompting a reevaluation of investment strategies. As a result, the once-booming Indian tech startup scene is now facing a more cautious and uncertain investment landscape.
Anand Lunia, a representative of venture capital firm India Quotient, has expressed concerns about the current slowdown in the Indian startup ecosystem. Lunia, who has invested in over 70 startups since 2012, stated that the current slowdown is unprecedented and could be extremely challenging for startups. He anticipates a difficult period ahead, referring to it as “brutal.”
Lunia also predicts the emergence of “zombie unicorns,” referring to companies that have achieved unicorn status (valued at $1 billion or more) but lack sustainable business models. These companies have halted hiring and may eventually become irrelevant in the market.
The absence of a viable business model poses a significant threat to their long-term survival and growth. Lunia’s comments highlight the potential consequences of the current slowdown and the need for startups to reassess their strategies and establish sustainable models to weather the storm.
According to sources familiar with the matter, Meesho, faced with challenges in raising fresh funds amounting to $1 billion, is now exploring options to raise debt and reduce expenses. The company’s monthly cash burn of $45 million and intense competition have reportedly made potential investors cautious. Reuters reached out to Meesho for comment, but the company did not respond.
The challenges faced by Meesho are indicative of a potentially challenging future that awaits numerous Indian startups. The declining performance of Indian tech stocks has become a cause for concern, and investors are increasingly cautious due to worries surrounding corporate governance. As a result, investors are intensifying their scrutiny during the due diligence process, which leads to delays in funding rounds, according to two venture capital executives.
There are growing concerns that valuations of Indian startups may be inflated, particularly when these startups heavily rely on discount-led business models with a bleak revenue outlook. This raises the possibility of a funding crunch that could potentially lower valuations and limit the availability of capital for growth, potentially leading to job cuts. Eight venture capital and startup executives have expressed these concerns, highlighting the potential impact on the unprecedented growth and attractiveness of Indian startups.
The recent announcement by BharatPe, an Indian payments startup supported by Sequoia Capital, to revamp its governance practices following an internal review reflects a growing awareness and proactive response to the importance of robust corporate governance in the Indian startup ecosystem. This underscores the industry’s efforts to address concerns and strengthen investor confidence amid the evolving funding landscape.
Vedantu, an online tutoring platform with a valuation of $1 billion and backing from Tiger Global, recently laid off 200 employees as part of a “load rebalancing” strategy aligned with its growth projections. The company made this move based on its expectations for future expansion.
Traditionally, Tiger Global has focused on larger Indian startups; however, recent reports suggest that the firm has informed bankers that it will now only consider deals involving startups with valuations below $200 million. This shift in investment strategy is aimed at mitigating risk, according to two executives familiar with the matter.
PREPARE FOR THE WORST
India’s startup ecosystem has witnessed significant growth, with Prime Minister Narendra Modi labeling the current decade a “techade” and expressing optimism about the emergence of new unicorns regularly. However, April marked the first month in over a year that India did not produce any new unicorns, which are startups valued at over $1 billion. Additionally, data from Venture Intelligence indicates that Indian startups raised $5.8 billion in March and April, a decrease of approximately 15% compared to the same period last year.
The global tech rout and various factors such as the Ukraine conflict and rising interest rates have adversely affected investor sentiment, impacting tech companies worldwide. Insight Partners, a prominent U.S.-based firm managing over $90 billion in assets, reportedly informed Indian founders that it would focus more on early-stage companies and reduce its investments due to these market conditions. SoftBank, the largest tech investor in India with over $14 billion in investments, has also reported a record loss of $26.2 billion at its Vision Fund investment arm.
The disappointment in November 2022’s tech IPO of SoftBank-backed payments app Paytm, which saw a 27% crash on its debut, further highlighted concerns about overvaluation and the prioritization of profitability in the Indian tech industry. These challenges indicate a need for startups to navigate the current volatile market conditions, address investor concerns, and focus on sustainable growth strategies.
The challenges faced by Indian startups are evident in the performance of prominent companies such as Paytm, Zomato, and Nykaa. Paytm has experienced a significant decline, plummeting a further 62% since its IPO. Similarly, Zomato and Nykaa, despite their blockbuster listings, have seen their shares decline by 67% and 43%, respectively, from their peak values.
In response to the changing investor sentiment and market dynamics, three Indian startup founders revealed that their investors have conveyed the message that the era of easy money is over. Investors are now emphasizing the importance of demonstrating a clear path to profitability. The founders have been advised to prepare for challenging times while maintaining hope for positive outcomes.
