Why are Startup, Unicorn Bubbles Bursting in the country?

Startup, Unicorn

KAKALI DAS

India’s start-ups story was discussed world over. Can’t say much about other masterstrokes, but Startups have rocked.

Thousands of Startups formulated in 2021, and unicorn every other day, valued at $1 billion. Last year, we achieved 100 unicorns in the country.

So many Startups achieving the dream of making it big. It was a matter of celebration for founders and venture capitalists, a large untapped market size to grab.

New company founders are hoping to become unicorn one day. It’s a coveted milestone. Government also praised it, took credit for huge success of Startup India. To be honest, any political party would have taken credit of the achievement.

However, most recently, Startups are facing the heat of 2022, and government quietly watches.

For example, health-tech Startup MFine (valued $500 million) fired 75% workforce, 600 employees impacted overnight. Cars24 also fired 600 employees.

Gaming unicorn MPL expelled 100 workers. Zomato-backed firm Blinkit has laid off 1600 from staff. Similar story in Edtech space.

As well as, venture capitalists and funds are saying “Winter is coming.” Basically ‘prepare in advance’ for bad days.

Trim the cost to company and survive.

In other words, funding shortage may shutdown companies that are low on cash, have no profits and viable business model. 60,000 could lose their jobs.

If we dig deeper, we find that it is not entirely government’s fault. Then who is the unicorn party pooper?

Prolonged pandemic has led to supply chain disruption and Russia-Ukraine war has caused energy crisis. There was excessive eagerness to bounce back in 2021, whereas in 2022 there is increased disinterest in the market. Central banks launched most widespread rate rise in 2 decades. Earlier more money was printed to beat the effects of pandemic. But it also led to inflation.

Now, to stop sky-high inflation, interest rates are hiked. So less money with venture capitalists. Venture capitalist put money in Startups to get high returns on investment. But only 23 of India’s 100 unicorns are profitable. What about the rest? So, no easy money for Startups. Unicorns that listed in the stock market were overvalued. What is their business model and profitability?

“So many Startups achieving the dream of making it big. It was a matter of celebration for founders and venture capitalists, a large untapped market size to grab. New company founders are hoping to become unicorn one day. It’s a coveted milestone. Government also praised it, took credit for huge success of Startup India. To be honest, any political party would have taken credit of the achievement.”

Today, listed unicorns have lost value up to 70% in the market. Other unicorns don’t want to IPO. And may be the number of unicorns is less than 100 because several have lost value. For example: Paytm mall valued at $3 billion in 2020,  but few weeks ago Jack Ma’s Alibaba and Ant Financial left, and valuation dropped 99.9% to only $13 million. This is the bubble of Startup ecosystem. Now, other unicorn bubbles may also bust any time. 

Startups require $10-15 billion funding for next 6 months but funds will fall short of this. Next 1 year is testing time for these Startups and unicorns. But the good news is that high quality talent will get new job in time. Every company wants experts trained in AI, Data Science, Machine Learning etc.

The question is, how did these Startups garner so high investments? What happened to astute judgement of venture capitalists? 140 crore population in a country is a huge number. That makes us the largest consumer marketplace. That is why Facebook, Twitter, YouTube have most numbers from India. But purchasing power is limited to similar numbers.

Nikhil Kamath of Zerodha explained that 9 crore people have Demat of 140 crore people. Venture capitalists are told that this number should increase from 6% to at least 25%.

Eyeing great potential they write big cheques. Kamath says that of 9 crore Demat accounts, only 3 crore have investments greater than 10,000. These numbers are low despite more new people entering, more Ads, more content related to market.

Once again that point: Only 3 crore have invested >10,000 via Demat accounts of 140 crore population. This is as shocking as 25,000 earning person in the top 10% earners. Fintech companies are after this group. They can barely make ends meet. We see big numbers like GDP, net worth of Adani-Ambani, etc. and feel satisfied. We don’t see the big picture, state of common men. 

In this market, social media content aggregating platforms do well, content is always free. Less news of unicorns in the coming days. No big investments any time soon for unicorns. They have to prove their business model. So far the mantra was the number of sign-ups or app downloads, but now the rules are different. Companies that can show profitability and long term business model will secure more funding.

“Nikhil Kamath of Zerodha explained that 9 crore people have Demat of 140 crore people. Venture capitalists are told that this number should increase from 6% to at least 25%. Eyeing great potential they write big cheques. Kamath says that of 9 crore Demat accounts, only 3 crore have investments greater than 10,000. These numbers are low despite more new people entering, more Ads, more content related to market.”

The unicorn party is still not over; it is only toned down a little. Not only funding, Startup founders are fleeing to Dubai, UK, USA, etc. for better Startup environment – regulatory environment, progressive Govt. policies, proper tax policies. A while ago, 30% tax was introduced or virtual assets and 1% TDS on buy/sale. This is why Web3 innovators switch to Dubai.

This migration is called flipping away. Founded here, registered elsewhere. Recently, Piyush Goyal urged Startups to incorporate and list in India. He assured that all problems will be sorted.

Startups, and unicorns are good for newspaper headlines but they don’t solve existing problems. Startups should be looked on forthe smallest businesses that are profitable. Government should focus more on small and medium scale businesses. Valuation, merely is not everything. Purpose is equally important.

Some Startups solving water crisis may not become unicorns, but they’re addressing real problem. They should get government backing. Rising entrepreneurial spirit needs minimal government interference. 100 unicorns a year is also possible that too without foreign funding. But, the year is going to be harsh for Startups.

[Headline Image: techstory.in; images from different sources. First published on 24-06-2022 on Mahabahu]

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