It is difficult to assume that Indian startups will continue to experience a downturn for very long given how much talent and attention they have attracted. However, there are at least three things that India can take away from this recession. First, we shouldn’t undervalue the significance of continuing to be appealing to international risk capital. Smart and aspirational Indian companies are left with considerably fewer options when global finance goes elsewhere.
Indians have good reason to be proud of our startup’s energy. Several government initiatives, including Startup India and Digital India, are said to have reenergized the industry. According to senior officials, “visionary and astute leadership” has “turned India into the [world’s] third-largest startup ecosystem.” The phrase “Startups are going to be the backbone of New India” was coined by Prime Minister Narendra Modi, who also formally established a “national startup day.” (January 16, for those who observe holidays.)
However, much of that enthusiasm appears misplaced or at the very least overstated in the icy, hard light of 2023. Over 25,000 employees have reportedly been let go by 92 companies in the industry since the start of the year. Many people who had intended to go public have delayed their offers and reduced the amount they hope to raise. For instance, Oyo Hotels, a provider of hospitality services, reportedly cut the amount of its first public offering from $1.2 billion to less than $500 million.
However, much of that enthusiasm appears misplaced or at the very least overstated in the icy, hard light of 2023. 92 companies in the industry are believed to have made layoffs. Other times, large financial institutions have reduced the value of some of their holdings by as much as 50%. There are progressively fewer investors available, to the point where a recent networking event fell into mayhem when scores of entrepreneurs showed up to discover that there were virtually no investors there.
It is not altogether surprising that an industry that relies so much on unrestricted funds from forgiving investors has struggled in a time of rising interest rates. According to some estimates, funding for the industry decreased by 75% in the first quarter of this year compared to the same period in 2022. Raising capital has proven to be particularly challenging for late-stage firms looking for money to expand their businesses.
For those in the industry looking to make money, higher inflation also means falling profit margins. Inflation also harmed chances for actual consumption growth among their target customers, aside from everything else. When your clients are in danger of taking a financial hit from rising prices for necessities, it is challenging to imagine optimistic growth scenarios.
It is difficult to assume that Indian startups will continue to experience a downturn for very long given how much talent and attention they have attracted. However, there are at least three things that India can take away from this recession.
First, we shouldn’t undervalue the significance of continuing to be appealing to international risk capital. Smart and aspirational Indian companies are left with considerably fewer options when global finance goes elsewhere.
Not all industries can be boosted by already-existing institutions or with public funds. Now there are rumors that Indian banks may have asked the central bank for an absurdly specific funding line to be used for startups. I hope that any such appeals are rejected by the Reserve Bank of India. High-growth risks should be taken on by specialized financial institutions rather than state-guaranteed banks or funds. The power of the government is restricted.
Second, we need to have a realistic perspective on the size and toughness of the Indian consumer market. Even if we could be the biggest country in the world right now, we won’t, if ever, have the biggest market.
Based on erroneous assumptions about who could afford their services, some Indian entrepreneurs sold investors on the sky-high hopes they had for them. Only a small portion of India’s 1.4 billion residents are middle-class consumers on a global scale. For instance, Indian fintech companies frequently cite the nearly global reach of modern payment platforms. On those networks, however, just 6.5% of users are in charge of close to 50% of all transactions.
The domestic consumer market in India isn’t big enough to support startup valuations, and it’s also not big enough to support the required rates of economic expansion. Both startups in India and businesses in the rest of the economy need to set their sights higher than just their own nation.
Let’s avoid assuming that success comes to us naturally. Many of our most admired industries, including information technology-enabled services, generic drugs, and automotive components, have fatal flaws or are in danger of being replaced by new financial, regulatory, or technological realities. At the very least, the startup industry might be able to respond quickly to shifting conditions. The other, older, champion sectors of India cannot be considered to be the same.
