Startups must prepare for worst as exuberance takes a break

Startup ecosystem in India has emerged as the crown jewel of India Inc. From job creation to innovative business model, startups have leveraged technology to solve myriad problems of Indian subcontinent. Many have gone global. Of late, however, there are rumblings. Some startups like Unacademy, Vedantu, Trell, Meesho, and a few others have started laying off staffers. More than 4,000 people lost their jobs so far due to such firing. As funding environment is likely to be difficult this year amid economic uncertainty, many startups are optimising their cost structures by shedding many non-core and new initiatives.

Such subdued sentiment is not limited to India. US, which is home to the greatest number of startups, is also witnessing such tightening of belt. Silicon Valley's famed startup accelerator, Y Combinator has cautioned its portfolio companies about funding dearth in the coming years. "The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare it to cut costs and extend your runway within next 30 days. Your goal should be to get to default alive," Y Combinator said in a note to founders of its portfolio companies.

Such cautiousness indicates that startups have to prepare for the worst as exuberance over growth and valuation seem to have taken a pause for now. Many experts are of the opinion that startups have seen a 13-year long bull run so far with investors pouring in billions of dollars. This has led to valuation going through the roof. With an expected downturn, valuations are companies receiving a reality check. Stock prices of listed startups have corrected 50-70 per cent in the last two years across most global exchanges. Even large funding rounds are becoming rare. India is home to 100 unicorns (startups with a valuation of one billion dollar or more) now but the pace of creation of such unicorns has slowed down substantially in recent months.

Difficult time forces people, and organisations to do some soul searching. Current craze for valuation without clear path to profitability is not a sustainable model. This is the clear lesson of current environment. Basics of any business are rooted in value creation. So, there is a limit to the extent, startups can sell a $10 worth product at $7 for grabbing the market share. At some point of time, the basics will catch up. It seems like the current situation is one such time. So, like any other business, startup ecosystem will go through intense pain in the coming years. Some will survive and some will not. And this is the nature of business world. But whoever survives from this downturn, will emerge stronger. Once the basics are put in place, those startups will not chase investors for fund raising, rather their internal accruals will take care of their future growth plans. India has high hopes from its budding entrepreneurs who have shown the world that they can leverage technology to solve many problems faced by the mankind. They should now take a vow to make the ecosystem sustainable for long-term wealth creation.