In 2020, the year the pandemic forced a reset in businesses around the world, hastening the digitisation of commerce, Nishank Jain and Sanjay Bhat set up Anar, a business-to-business platform. Small and medium-sized businesses — whether retailers, resellers, wholesalers, distributors, or manufacturers — could use the platform to create profiles, upload catalogues, form connections, post their requirements, and interact with each other.

Within months, the venture attracted $6.2 million seed funding from Elevation Capital and Accel India, among a host of other investors. However, three years down the line, the founders decided to shut shop and return the leftover capital to their investors.

Jain says the start-up struggled to retain clients as it failed to create enough value for sellers and buyers. “We switched between models on a continuous basis but only had the smallest retailers or new businesses sourcing through Anar,” he says.

Unable to onboard bigger and established players, the platform turned financially unviable.

In the past year, more than a dozen start-up founders in India have handed back to investors the cash remaining after winding up ventures that proved non-starters. 

This comes amid an ongoing slowdown in the start-up funding ecosystem, with investments in tech ventures hitting a five-year low of $7 billion, according to Tracxn. While the impact is felt at all stages of start-up funding, the worst hit is late-stage funding, which plunged 73 per cent to $4.2 billion in 2023.

When capital crawls back

In what is being described as a ‘maturing start-up ecosystem’, an increasing number of founders now appear ready to admit setbacks sooner and transfer unused funds back to investors.

Sagar Modi and Advaith Vishvanath, for instance, returned money to investors within just a year. Having founded SuperShare, a content sharing platform, in 2019, the duo raised $6.5 million series A funding from Lachy Groom, Accel India, Lightspeed, comedian Tanmay Bhat, MythPat and influencer management agencies in July 2022. 

SuperShare, which helped social media influencers and other content creators go viral through shares, found itself in demand with the massive adoption of social commerce in India. Users who shared content were, in turn, rewarded with points that they could redeem against products or services on other sites. However, SuperShare struggled to grow beyond a point and was forced to pull the plug. 

Edtech start-up FrontRow recently shut down, barely two years after raising $14 million in a series A round. It returned the money to its backers — Lightspeed and Bollywood actor Deepika Padukone. 

The hobby learning platform initially attracted an enthusiastic user base. An angel funding round was snagged with ease. Within six months, however, trouble loomed.

“We had scaled to $1mn annualised revenue. We plateaued there while our marketing cost ballooned to over 100% of revenue and our course completion stayed below average,” co-founder Ishaan Preet Singh had posted on LinkedIn.

Kalaari Capital-backed health-tech start-up ConnectedH wound up and returned invested funds after it “ran into certain market realities”, its co-founder Suresh Singh shared on LinkedIn.

After raising nearly $24 million, Mojocare — founded by Ashwin Swaminathan and Rajat Gupta in 2021 — started making all the wrong headlines after investors uncovered financial irregularities at the firm. The founders ended up firing most of the employees and returning money to investors.

Over the last two years, as start-ups struggled to navigate the capital growth and regulatory landscape amid a funding winter and dipping valuations, inefficient businesses were forced into an existential crisis, says Subhadeep Sanyal, partner at impact venture fund Omnivore. “Returning capital responsibly is generally seen by investors as better than founders recklessly burning through cash.” 

Echoing this, Anirudh A Damani, Managing Partner, Artha Venture Fund, underscores the need to prioritise ventures with potential for outsized returns. 

“When a venture is in decline, referred to as a ‘zombie’ in VC parlance, the decision to shut down and return funds can be prudent. Eventually, we know that less than 10 per cent of our investments will drive 95 per cent of our returns; returned capital should be viewed positively — even if it is less than what was invested,” Damani says.

Intelligent gamble

While not all struggling companies see boarding up as an acceptable option, the stigma around such calls has eased. The changing outlook is linked to the fact that many seasoned executives have turned founders and they believe that moving on from an unsuccessful project is a pragmatic step. They don’t see sense in stringing investors and employees along when they could, instead, walk back to the drawing board and start afresh.

“It is always an intelligent gamble, both on the part of the investors as well as the entrepreneurs, with innumerable unknown variables. If these same founders started something else tomorrow with strong unit economics, product-market fit, and cash-flow cycles, then they will have every chance of raising capital again,” Sanyal stresses.

In 2020, Anil Goteti left Flipkart and established SaaS start-up Protonn together with former colleague Mausam Bhatt. Protonn raised $9 million from Matrix Partners and Tanglin, but returned the capital within six months.

“When things are not going right even after trying everything in your capacity, the right thing to do is return money to investors. Few entrepreneurs or companies take this call,” he says. 

In 2022, Goteti made a comeback with travel-fintech Scapia, picking up $9 million from nearly the same set of investors.

There aren’t just many firsts in the start-up world... there are several successful second chances too.