A funding slowdown has hit start-ups across stages, whether it is growth-stage companies unable to raise new funding, or early-stage start-ups that have to settle for lower-than-expected valuations and fund sizes. 

The total funding in the Indian start-up ecosystem fell by 40 per cent to $6.8 billion during Q2 CY22, according to a recent PwC India report. Only four Indian start-ups entered the unicorn club in the quarter, in line with a global decline in the number of new unicorns that have emerged in this period. The report added that early-stage deals made up 61 per cent of the total deal volumes in Q2 CY22..

Why is it happening?

The dip in funding is attributed to a market slowdown and economic volatility on account of the prevailing macroeconomic and geopolitical conditions, which have driven inflation, commodity prices and interest rates. Many venture capital firms that have closed new funds continue to invest. However, VC sentiment has turned conservative, and they are now negotiating valuations, asking tough questions about profitability and, in some cases, preferring follow-on rounds to taking new bets.

How is that impacting start-ups?

Also read

Start-ups pull back, defer job offers made at campuses

BYJU’s-owned Toppr lays off of 300 employees

Ola initiates downsizing across verticals; up to 500 may be laid off 

The start-up ecosystem has seen a pick-up in M&A activity. According to PwC, around 54 M&A transactions were executed in the second quarter. The largest deals were in the foodtech space, including Zomato’s acquisition of Blinkit, and Swiggy’s acquisition of Dineout. PwC expects consolidation and buyouts to increase, given the broader correction in the funding market.

In addition, smaller companies such as Lido Learning, Udayy and Vauld have shutdown operations as they have struggled to raise funds in the ongoing downturn. Multiple start-ups, including Ola, Oyo, Snapdeal and Pharmeasy, have reportedly delayed their IPO plans given the market uncertainty.

How are they preparing for this challenging time?

Start-ups are rationalising their business verticals and burn rates by cutting down their workforce and closing verticals, among other things. The number of lay-offs is rising by the week, well-funded companies like Unacademy, Cars24, Meesho, and Vedantu, among others, have together laid off thousands of employees. In the past few months, layoffs by start-ups are estimated to have impacted 10,000 people.

Start-ups have also started cutting down employee incentives, delaying appraisals and deferring campus recruitments. On Tuesday, edtech major Unacademy announced pay cuts for CXO level employees, discontinued complimentary meals at the office, and shut down its global test-prep business. The company has laid off around 750 employees in the past few months. 

Mobility unicorn Ola has also delayed employee appraisals, shut down its grocery delivery vertical Ola Dash and used-cars business Ola Cars, and is in the process of laying off around 400-500 employees. Similarly, Meesho laid off 150 employees as it restructured the grocery business Farmiso, and integrated it into the main Meesho app as Meesho Superstore. 

Edtech major Byju’s, which was valued at $22 billion in the last funding round, is also feeling the heat. Two of its companies, Toppr and WhiteHat Jr, have together laid off around 600 employees. It is struggling to close its $800-million funding round, as Sumeru Ventures and Oxshott have not transferred $250 million out of their total commitment, on account of “macroeconomic reasons.”

How long will this last and will it end the dream-run Start-ups are having in India?

Venture capital firms and research firms predict the funding winter to last between 12-24 months. The funding slowdown has normalised the frantic valuations and fund sizes raised by start-ups in 2021. Investors see this as a sign of sanity returning to the market and predict that stronger, sustainable businesses will emerge from these times.

Related Topics
comment COMMENT NOW