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Indian Startup CrisisIndian Startups

Harder Times Ahead of Indian Startups?

This year, we saw Germany based Rocket Internet backed Jabong's acquisition by Flipkart-owned Myntra was something that the Indian e-commerce space had been expecting for a long time. The Indian fashion e-tailer had been on the shopping aisle itself for quite sometime before being finally snapped away by Myntra.

While Jabong's acquisition wasn't such a shocking news, what caught everyone's attention was the price point at which the e-tailer was acquired. Myntra has paid just $70 million for Jabong, which was much less than the expected figure of $250-$300 million figure. Founded in the year 2012, the online fashion portal till a couple of years ago was negotiating with Amazon at a price tag of a whopping $1.2 billion, a figure which is much more than the $70 million figure at which it was finally sold.

While dissecting the Jabong case, Industry experts came to the conclusion that a number of factors were responsible for the once shining star of e-commerce to take such a plunge to the grounds. According to them, Jabong's weak business model, an inefficient execution of the same, loss of market share, senior level churn and finally, it's investors' unwillingness to invest more capital, all actively contributed in one of the biggest etail failure in the recent times.

Jabong's failure wasn't a one off case. The e-commerce startup's debacle proved to be a warning bell for the Indian startup sector and helped in pulling the sector's attention towards the frequent shutdowns, layoffs, devaluations, funding crunches and mergers & acquisitions that the sector had been witnessing in the last couple of months. Some experts believe that a majority of venture funds end up forcing their companies to become unicorns, $1 billion valuation startups, just so as to brag about it. Because of this very reason, in various sectors valuations ended up going way ahead of value creation. And now, it seems, some catch up is happening.

Between the years 2014 and 2015, a lot of new investors like late-stage private equity (PE) funds and global hedge funds debuted their game in the Indian venture capital ecosystem. With these new debutants, the Indian startup ecosystem has seen a lot more money being pumped into the sector. An important factor here is, a majority of these investors are valuation insensitive. This had resulted in the startups raising much more money at higher valuations than normal. In addition to this, the subsequent funding rounds were also being done quicker than before.

Industry experts believe that this was just a temporary situation and now investors are trying to bring normalcy back into the Indian startup ecosystem. The investors are now focusing more on their startup's profitability, their path to achieve it, unit economics and basic business model defensibility as against to the prior approach of just looking into growth, GMV (gross merchandise value), market share, etc. In today's time, in order to raise money, startups have to answer a lot more difficult questions and be much more convincing and give the investors solid proof of their concepts.

Flipkart's journey from 2007 till now, rightly documents the journey of the Indian startup ecosystem till now, in terms of funding. Since 9 years of its inception, Flipkart has been successful in raising a whopping $3.2 billion till now. Considered as one of the most successful startup in India till date, Flipkart last raised funds in the year 2015, which resulted in the company being valued at a whopping $15.2 billion. But since last year, Flipkart's valuation has been going downhill, with the company currently being valued at around $10 billion.

According to data from Venture Intelligence, between April 2014 to March 2016, the Indian tech startup industry has seen some 29 acquisitions. This figure has shot up to a whopping 40 acquisitions from April this year to mid-August and the 2016-17 touted as year of acquisitions. In the year 2015, 16 VC-funded startups had to shut down their shops during the course of the entire year. What is shocking is the fact, that an equal number of startups have shuts down their operations in a short period of January to July this year. It would be interesting to know the final figure when the year ends.

The biggest mountain that the Indian startups are currently facing is the mountain of funding crunch. According to data from Venture Intelligence, from January to June 2015, the Indian subcontinent saw PE investments of $7.31 billion across 373 deals and VC investment of $970 million across 242 deals. During the same January-June period this year, the PE investments dropped to $7.16 billion across 314 deals and VC dived to $646 million across 211 deals.

What lies ahead?



For the next 12 to 24 months, the Indian startup ecosystem is expected to experience something similar to what happened after the big dot-com bust. The startups will find it highly difficult to obtain funding, especially around the e-commerce sector. This is mainly because the quantum of funds required will be very high and it’s still very unclear on how the Flipkart vs. Amazon vs. Snapdeal scene is going to pan out. Current investors will have to take some difficult decisions like if they want to continue investing or just bow out by selling the business.

According to many experts, the current scenario will help in weeding out the weak. The only way startups can survive this period is by being a full stack company that is capable of solving the full problem of the consumers rather than just parts. The startups need to focus on creating their own brand, differentiate themselves from the pack and have a clear monetization model and viable unit economics. The players need to understand that they have to get their core model right because no amount of funding can make a company with a broken business model work.

[Top Image - Shutterstock]

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