Dawn of reality

The Indian start-up ecosystem which had been on steroids in 2021 — with the highest ever private equity and venture capital investments and exits — will have to brace itself for a more challenging environment going ahead. The large losses recently reported by some global funds that invest in new age technology companies will likely turn them more cautious in the future. Softbank’s Vision Fund posted a 3.5 trillion yen loss for the year ended March 2022 due to its investment in high growth technology stocks across the globe. Tiger Global hedge fund is reported to have lost $17 billion in the first four month of this year as investors exited over-valued technology stocks. The losses disclosed by these companies could just be the tip of the iceberg. Excessive liquidity provided by global central bank stimulus and ultra-low interest rates had made global PE and VC funds chase new age technology stocks which promised high growth, as digital adoption grew in the wake of the pandemic. But a large part of the funds may have been invested in companies which may not meet their growth projections. Besides poor governance and lack of competence, many of these start-ups such as those related to cryptocurrencies and gaming platforms face high regulatory risk. As the funding environment gets tighter with the US Fed and other central banks beginning to roll-back easy money policies, the value of the weaker start-ups is beginning to drop. The crack-down on edtech start-ups in China in 2021 and the sharp decline in technology stock prices on the Nasdaq have added to the losses of PE and VC funds.

The troubles of the global investors are already reflected in the start-up investments in India. Funding received by Indian start-ups in first quarter of 2022 was 32 per cent lower when compared to the third quarter of 2021, when investments had peaked. Venture capital inflows as well as number of deals have dropped steadily between January and March this year. Also, start-ups providing technology-based enterprise solutions, those in e-commerce, fintech and edtech were favoured in the first quarter of this year indicating that investors were looking for companies with sound business models. With investors becoming more astute, Indian entrepreneurs will have to up the ante on product innovation and in proving a sustainable revenue stream to attract fresh investments. This is good for the Indian start-up ecosystem as only the best products and services will be able to expand.

Increased supervision and scrutiny of businesses which have already received PE and VC funds will have ramifications for employment and consumption in the economy. With investors demanding improvement in business profitability and growth, companies can no longer continue spending the funds on subscriber or client acquisition and on large pay-packages for the employees. They will have to start reducing their operating costs to show improved margins. There are reports of mounting pressure on several e-commerce and ed-tech firms leading to retrenchment of thousands of employees. If pay-scales are also lowered, this could impact consumption in the economy. These are, however, necessary adjustments needed to inculcate better responsibility towards shareholders and investors and to ensure long-term sustainability of businesses.

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