Building sustainable startup ecosystem

Startup ecosystem across the world is going through a turmoil. From a funding winter to hiring freeze and even laying off employees, once touted as the new engines of growth are witnessing headwinds. Many industry watchers see it as the first such slowdown among startups since the days of global financial crisis in 2008-09. Since then, these new age companies have grown in both size and shape through consistent infusion of risk capital by PE and VC funds. Valuations have soared across the board as the world becomes familiar with terms such as unicorn and decacorn among others. However, excess exuberance seen in any sector is always a red flag to watch out for. When individual angel investors committed money over Whatsapp chat and wrote cheques without even interacting with founders in the last two years, such out-of-sync optimism is reflection of a toxic and unsustainable environment. Current events such as firing of employees, low funding prospects and closing down of some startups are indication of this unsustainability.

Till now, India has seen around 12,000 staffers of startups losing their jobs in the last six months. Last week, India's biggest startup in terms of valuation Byju's laid off 600 staffers- 300 from its Toppr learning platform & another 300 at coding platform WhiteHat Jr. Currently, Byju's valuation stands at $22 billion, making it the most-valued startup in India. Interestingly, the edtech giant acquired 10 entities last year at a combined investment of $2.5 billion. Other companies including Unacademy, WhiteHat Jr, Vedantu, FrontRow, Udayy, Lido Learning and others had fired employees in the last six months. Funding tap is also slowly drying up. Venture capital funding into Indian startups dropped by 37 per cent in April-June period of this year to $6.9 billion as compared to last year. Such slowdown shows that the fear of a funding winter is real. As the world is anticipating a recession in the US economy towards the end of 2022, such scenario may further aggravate in coming months.

Against this backdrop, it is worth pondering over the age-old wisdom on business practices. Any commercial activity without profitability is not worth pursuing. Startups which chase market share through burning cash are realising it the hard way. Therefore, Indian startups have to make profitability the key objective before market share. Secondly, many experts have expressed their doubt about astronomical valuation of startups. It seems the funding rounds are beyond the understanding of most finance professionals. Moreover, many startups have pictured a very rosy picture with regard to market opportunity and how their companies will be able to grab them to fund houses. However, there is a critical mismatch between expectations and reality. For instance, edtech companies raised billions of dollars during the pandemic, pitching to investors that students would only learn through digital platforms. But as things normalise, schools reopen; parents are more keen to send their children to schools and physical classes than making them sit before the laptop. So, the projections were based on fictious estimates, holding no water. Therefore, Indian startups have to be realistic in their expectations and fund houses have to understand the ground reality to make the whole ecosystem sustainable. Otherwise, startups will not be able to attract right talent as people will shun these new age companies as unstable entities.