A confluence of crises is sweeping through the world, hammering the economies around the world. Is it indicating an even larger crisis ahead?
On an early October day in 2008, Sequoia Capital, the benchmark venture capital firm the world swears by, called an emergency meeting of its entrepreneurs, including Alfred Lin, a partner at Sequoia and a former executive at Sequoia-backed Zappos. Lin and others heard from a handful of partners and sat through a presentation on the worsening financial crisis and measures their businesses could take to blunt its effects.
The first slide had an image of a tombstone that read “R.I.P. Good Times.” The weeks leading up to the meeting saw the collapse of Lehman Brothers, the bailout announced, and the worst week of losses in the history of the Dow Jones. On May 16, 2022, the company made another presentation that had the echoes of its 2008 deck – it has sent shivers down the spines of even the toughest corporate leader in the world.
A confluence of crises is sweeping through the world – the Russian war against Ukraine creating an energy crisis, a supply chain disruption triggered by the resurgence of Covid-19 in China, worldwide inflation, and now a looming global food crisis. Each crisis is feeding on the other and sending shockwaves across several industries, from semiconductors, automobiles, and batteries to the venture-capital fueled high-octane start-up ecosystem that flourished during the pandemic.
A record 44 Indian startups achieved unicorn status in 2021.
Riding high on astronomical valuations that captured the public imagination, markets were sold stories of the future. That attracted trillions of dollars of VC funds to startups. The exuberance of 2021 saw VCs and PE (private equity) funds pump around US$38 billion into Indian startups. India became the third-largest startup ecosystem in the world after the US and China, according to the Economic Survey report of the Government of India.
A record 44 Indian startups achieved unicorn status in 2021, taking the overall tally of startup unicorns in India to 83, with most in the services sector, the survey showed. But yesterday’s valuations are now a fiction. Companies like Zomato, Nykaa, CarTrade, Policybazaar and others have witnessed a 40%-60% dip in their stock prices while Paytm was trading at a quarter of its IPO issue price, towards the end of March 2022.
Sequoia Capital the venture capital giant—known for investments in tech titans such as Apple, Uber and Google—shared a 52-slide presentation with 250 founders on May 16 over Zoom that warned of a “crucible moment” of uncertainty for the venture market due to inflation, the markets and geopolitical issues. Sequoia joins a chorus of venture capital firms and investors on Twitter warning founders about the current macroeconomic environment.
Per research by Bain & Company (in partnership with the Indian Venture and Alternate Capital Association), the number of venture capital agreements is expected to decline this year. Indeed, according to a Crunchbase analysis, worldwide VC financing fell by $10 billion months over a month in February ($52 billion). According to the study, early-stage and late-stage financing declined by 17% and 19%, respectively.
Indian startups laid off 6,900 employees in the first four months of 2022.
SoftBank Group Corp has marked down its investment in Paytm parent One97 Communications to $800 million, its annual report showed. The Japanese conglomerate invested $1.4 billion in Paytm via its Softbank Vision Fund 1, which was now come down to $800 million as of March 31, 2022, owing to a steep drop in Paytm’s valuation. IPOs of several startups have been deferred. Boat, a direct-to-consumer (D2C) brand, Oyo Hotels & Homes, Snapdeal and PharmEasy are delayed.
Employees are also quitting startups. Ed-tech firms, Unacademy, and Vedantu too laid off hundreds of employees. Recently, other companies including Meesho, Trell, Furlenco, OK Credit, and Lido Learning too have announced lay-offs as the ecosystem has experienced a dry run in large funding rounds this year, compared to 2021. Indian startups laid off 6,900 employees in the first four months of 2022. In May alone, unicorns like Vedantu and Cars24 fired over 1,200 employees.
In a protest against the company asking its employees to resume reporting from their offices in Gurgaon and Mumbai, employees of WhiteHat Jr, the coding start-up of Byju’s had resigned en masse. WhiteHat Jr has posted a massive Rs 1,690 crore loss in the financial year 2021 while generating an operating revenue of Rs 484 crore in the same period.
Around 40-50% of workers leaving startups are getting hired by IT firms, consulting and product companies and global captive centres, according to talent consulting company Han Digital. In fact, one in five people left startups voluntarily to join the IT-BPM sector over the last year.
One of the major reasons for EdTechs cutting costs drastically is the dwindling demand for online education as offline educational institutions/schools open up. To attract students, Vedantu recently launched Ai Live, an interactive platform to help bring down the fee structure for a one-year long-term course for grades 6 to 12 from Rs 22,000-25,000 a year to Rs 5,000 annually.
According to the latest report by IVCA-EY, Indian startups raised only $1.6 billion in April 2022. This is almost half of the capital raised by the same ecosystem in April 2021. To make matters worse, no company entered the unicorn club last month whereas April 2021 had flagged off the momentum of unicorn creation last year with eight new additions. April 2021 saw the birth of startups like Meesho, PharmEasy, CRED, Groww, ShareChat, Gupshup, Chargebee, and Urban Company. This year, there was none.
Quarter-on-quarter data points to a slowdown in Indian startup funding too. From the record quarterly funding of $17.1 billion in Q3, the tally fell to $14.5 billion in Q4 2021 and then $11.8 billion in Q1 2022. The IPO parade has come to a standstill — just showing that even slightly mature startups are feeling the heat of the global economic crunch.
(Abhijit Roy is a technology explainer and business journalist. He has worked with Strait Times of Singapore, Business Today, Economic Times and The Telegraph. Also worked with PwC, IBM, Wipro, Ericsson.)
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