Vinay (name changed) was hired by an Indian unicorn soon after he finished his Master’s degree in June 2022. The previous year had seen an unprecedented growth for several start-ups backed by an abundant flow of investor capital. When he joined the new workplace, traces of euphoria still lingered in the air.
Soon though, things took a tumble. Global economies slowed down. With the Russia-Ukraine and Israel-Palestine wars, the global supply chain and trade outlook started looking bleak. The tap dried up, and 2023 saw the lowest start-up funding in five years.
In September 2023, Vinay was laid off. “The manager cited revenue crunch as the reason. A few more were laid off along with me, and a few others quit later. News spread that the company was not doing well,” he recollects. Vinay later joined another start-up, but he says things are not hunky-dory there either. “We recently had a town hall where the CEO announced that the company is struggling and we may not get any raises this year.”
Vinay is one among the thousands in India who got laid off in 2023 after a severe funding winter left several companies high and dry. As per data from global start-up data platform Tracxn, tech companies in India saw funding to the tune of $8.3 billion in 2023, a 67% drop from the previous year. While experts differ on whether the dry period will continue or if the worst is behind us, there is a consensus on one thing — that a market correction is underway.
The great Indian start-up splurge
Start-up funding hit a record of $42 billion in 2021. High on the venture money, several start-ups hired in significant numbers; they went on acquisition sprees and splurged on marketing. Valuation numbers skyrocketed. The year saw the birth of 42 new unicorns in India, the highest ever. The list included names like Meesho, UpGrad, CRED, ShareChat, and BharatPe, among others.
Pranav (name changed), who joined a unicorn around that time, remembers how he was astounded to see the extravagance. “I heard the entire company took a trip to Thailand almost a year before I joined,” he says. The start-up’s valuation had hit $7.5 billion that year.
And then the bubble burst. In 2022, overall funding in the Indian start-up ecosystem came down to $25 billion, a 40% decrease compared to the previous year. Things got even worse in 2023.
“On one hand, there were the global macroeconomic conditions and difficult access to funds with slow economic growth. But the other factor was the huge investments in everything digital in COVID-19 times. The assumption was that it was going to continue at the same pace,” says Sangeeta Gupta, senior vice president and chief strategy officer at NASSCOM. But as people came back to the real world, there was an increased focus on the return on investments, and reassessments happened on the investments made. This impacted the potential acceleration in some markets, she says.
Lack of domestic capital
As much as the macroeconomic conditions and the start-up founders’ non-adherence to business fundamentals contributed to the crisis, the absence of domestic capital in the Indian start-up ecosystem has only aggravated the situation.
Some of the biggest Limited Partners (LP) in the world are from the US, Canada, Singapore, and the Middle East. These include funds like the Alaska Permanent Fund, Ontario Teacher’s Pension Plan, GIC and Abu Dhabi Investment Authority among others. VC firms raise money from such LPs, and consequently, the Indian start-up ecosystem is exposed to global fluctuations.
“The Indian institutional market has to open up for India to be a dominantplayer. Globally, one of the big sources of funding for technology, venture, and start-ups is pension. But Indian pension funds are not investing,” notes T.V. Mohandas Pai, chairman at 3One4 Capital and former Infosys board member. “The total money coming into the pension system is around ₹5 lakh crore. If ₹5,000 crore can be invested into ventures and start-ups, it would be a good start. But there is no such regulation, and hence they are not investing,” says Pai.
“The Union Ministry of Finance is hostile to the tax issues of start-ups. The regulatory system is hostile. The latest regulations by RBI say banks and NBFCs cannot invest in Alternate Investment Funds (AIF). It is a very authoritarian, ill-advised circular,” Pai says, not mincing words. The circular was issued last December to prevent questionable bank transfers, but he notes that when such blanket bans are imposed, the genuine players also get hurt in the process.
Layoffs, loud and silent
A major repercussion of the funding winter has been mass layoffs. According to data from the international layoffs.fyi, tech companies gave the pink slip to around 17,000 people in India from 2023 to date.
Suresh Bhagavatula, professor at the Indian Institute of Management – Bangalore, notes that the availability of easy money in 2021 also created a salary bubble for talent: “I heard some insane stories of how start-ups recklessly sought talent at any cost, bumping up the remunerations. Now, these start-ups are trying to rectify the situation.”
Not all layoffs have been explicit, says Pranav who quit the unicorn and joined another start-up in 2023. “I have been seeing a trend of ‘silent layoffs.’ Instead of directly laying people off, companies would give them lower ratings, nudging them to leave.”
According to data from a study conducted by market intelligence technology company Private Circle, between September 2022 and July 2023, up to 111 Indian unicorns witnessed an attrition rate of 4.72%. Their data also showed that in Bengaluru alone, 41,208 employees exited the unicorns in the same period.
“The other part of this is that companies are not spending a lot of time on retaining talent unless they are exceptional. Earlier, there was an option of negotiating. You could take an offer letter to your employer and ask if they were ready to match it. That has reduced,” says Pranav.
Cautious investor
One of the clear outcomes of the churn is the decreased investor confidence in unicorns and late-stage start-ups that have been chasing growth without paying attention to business models or profitability. “With access to easy money, start-ups pursued vanity metrics and the elusive ‘network effects’, disregarding the costs and profitability. This, in turn, could have led to a decreased confidence among the investors that these ventures are unlikely to survive without continuous capital infusion,” says Prof. Bhagavatula. “Furthermore, the absence of mergers and acquisitions coupled with the poor performance of listed start-ups does not seem to give any exit options for investors, leading to this winter,” he adds.
If the investments were earlier heavily skewed towards unicorns, there is investor interest and activity in early-stage start-ups lately. The pace, however, is still slow. “There is enough dry powder available with VCs. But earlier, any start-up with a reasonable average idea could raise money. Now the bar has been raised,” says Madan Padaki, President at The Indus Entrepreneurs – Bangalore. He feels that cautiousness is good as it pushes start-ups to think more about revenue models, profitability, and sustainability.
Frugal, profitable
Within the start-ups too, similar sentiments echo. “There was a point when so much money was being pumped in that it was becoming unrealistic what companies were doing with it. Companies thought the tailwinds of the pandemic were never going to go away,” says Pranav, who holds shares of the unicorn he used to work at. When the company valuation more than doubled in 2021, the value of his shares went up by 2.5x.
As the funding winter set in, several start-ups, including Byju’s, Ola, Udaan, Swiggy (later marked up by 9%), PharmEasy, Pine Labs and Oyo, were marked down. The value of Pranav’s stocks has also fallen with the news of an impending down round of his former employer.
“There’s a higher focus among companies now on being frugal. For example, earlier for long travel we were allowed business class. That’s not the case anymore. There is a stronger focus on driving more organic business leads and a higher focus on efficiency,” he says.
Marketing spend has been significantly reduced. Several jobs, especially related to content and design, are being moved from the West to India. “Earlier companies thought it was important to have a presence in the West as part of the market expansion. There are still field roles in those regions. But content and design jobs are coming back to India, and that alone helps companies save ₹50-60 lakh. More stable people, not necessarily from the founding team, are being hired to head start-ups now; no more ‘showy’ CEOS,” says Pranav.
Learning from a crisis
Bengaluru, being the start-up capital and Silicon Valley of India, has been impacted significantly due to the funding crunch. According to the Karnataka Mid-Year Review of State Finances 2023-24, the start-up funding in the State dropped by a whopping 80% in 2023 compared to the previous year.
Priyank Kharge, Karnataka’s IT-BT Minister, says since November, the government has been engaging with the VCs in a first-of-its-kind move. “They are evolving a blueprint for the government to understand how we can help start-ups add more value,” says Kharge, who swiftly clarifies that he is not referring to the ‘valuation game.’
“One of the biggest reasons for this venture winter is the valuation game that people have been playing. Once the blueprint is ready, we will reach out to the start-ups,” he says.
According to him, the government is also coming up with a framework that would allow fewer start-ups to fail. Under its ELEVATE programme, the State government gives a one-time grant of up to ₹50 lakh to early-stage start-ups. Under preferential market access, the government aims to promote public procurement from start-ups.
Padaki notes that there is also a need to crack financing for start-ups at a structural level, as many banks still hesitate to provide collateral-free loans to start-ups. Above all, it’s important to codify the lessons from this crisis so that it can be averted in the future, he says.
NASSCOM’s Gupta agrees. “The entire ecosystem needs to make sure that while there may be easy money available in a future cycle, you don’t lose sight of the business fundamentals,” he says. “It doesn’t mean you don’t raise VC money or spend on marketing. It’s about keeping in mind the right ratios and balances, thinking about your growth outcomes, planning for your talent capacity, and preparing for a rainy day because these cycles will become even shorter in the future.”
