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Published on: Aug. 21, 2022, 2:14 p.m.
Start-ups: On a sound wicket
  • Thanks to its expertise in technology start-ups in India have come into prominence in the last decade

By Ritwik Sinha. Consulting Editor, Business India

Stock market veteran Shankar Sharma has quite a reputation for making poignant remarks every now and then. His latest volley, when Zomato scrip plunged heavily in the last week of July, was in such a league. He equated the continuous plunge in the share prices of one of the best known start-ups with a famous dialogue of Amitabh Bachchan in 1975 flick Deewar. “Mar to woh bees saal pehle gaya tha. Aaj to sirf ussey jalaya ja raha hai. It was game over on listing itself,” he tweeted. 

The promoters and investors in the company may not take this comment kindly but it definitely raises a larger point pertaining to the fundamental flaws in the startup eco-systems driven by the valuation driven methodology. It also raises doubts about the resilience of start-ups, when judged by the usual parameters applied on brick and mortar entities for decades.

Zomato, a popular food delivery and a front line start-up, backed by a line of prestigious investors, had made it to the bourses with much fanfare, with its IPO oversubscribed by 38.25 times in July 2021. The shares, which were offered in the Rs72-76 band, had opened at Rs115 at the bourses. It later shot up to Rs169, its 52 week high. 

But since then, Zomato shares consistently lost its sheen crashing to a little above Rs40 around this August beginning. Its current market cap is in the range of $5.5 billion, which had touched a peak of over $16 billion last November. But Zomato is not alone in the start-up powerhouse bracket that is finding it difficult to bear the hard-nosed evaluation mechanism of market pundits.

PayTm, another big name, has been at the receiving end as well since its enlisting last November with share price now trading in the Rs700-800 range, as against the opening band of Rs2,000-2,150. Needless to say, the drubbing of the leading new age players in the stock market has created nervousness all around.

But, as an expert points out, start-ups all over the world including India, which has emerged as a commercial hotbed, are now in a serious transitional phase, where the successful ones will have to leave behind their cash burning attitude and show similar deftness in cash earning capabilities. As far as ecosystem goes, the start-up growth story still has many interesting chapters, which are waiting to be added.

Expanding stage 

Thanks to its expertise in technology and the resultant ease in the advent of the digital era, start-ups in India have come into prominence in the last decade, as they introduced new solutions to the stakeholders in key business value chains. The country, in fact, emerged as one of the leading startup turfs in the world.

“Major economic reforms and the rise of the technology industry has set the foundation for the surge of entrepreneurship in the country,” says Sujeet Kumar, co-founder, udaan. “With proven tech prowess, the start-ups entrepreneurs identified and took advantage of the huge opportunity that a country like India offers -- both in terms of size and young population”. 

Adds Rahul Garg, founder, Moglix, “The Economic Survey of 2021-22 suggests that, following the US and China, India has become the third-largest start-up ecosystem in the world. Fintech, e-commerce, SaaS and marketplace players are giving established giants a run for their money”.

According to Samson David, CEO & managing director, Soroco, the boom witnessed in the Indian start-up world has its roots in the late 1980s and early 1990s, when the first wave of IT behemoths such as Infosys, Wipro, HCL & TCS opened the doors to innovation. “Over the last 10 years, we have seen unprecedented growth, with 100+ active incubators fostering and nurturing the start-up ecosystem,” says he.

  • An impressive 746,000 jobs have been created by the Indian start-up ecosystem, so far

    An impressive 746,000 jobs have been created by the Indian start-up ecosystem, so far

While some early movers had arrived around 2010, the real push to the sector is believed to have come after the government got into the play. During the Independence Day speech from the Red Fort on 15 August 2015, Prime Minister Narendra Modi had envisioned a new India, which taps on the entrepreneurial potential of its young people, well-versed in technology.

The following year, a programme was set afoot to build a strong ecosystem for nurturing innovation and start-ups in the country. And industry observers acknowledge that the contribution coming from the government intervention has changed the scene for the Indian start-ups, with the country becoming the third largest ecosystem. 

According to a recent release from the department for promotion of industry & internal trade (DPIIT), while the initial 10,000 start-ups were recognised in 808 days, the latest 10,000 were achieved in only 156 days. “With more than 80 start-ups getting recognised per day – the highest rate in the world -- the future of the start-up culture looks promising and encouraging,” says the release.

Meanwhile, the DPIIT has recognised the presence of 75,000 start-ups in the country. While about 12 per cent of them cater to IT services, 9 per cent serves healthcare and life sciences, 7 per cent are in education, 5 per cent with professional and commercial services and 5 per cent in agriculture.

“An impressive, 746,000 jobs have been created by the Indian start-up ecosystem, so far, which has seen a 110 per cent yearly increase over the last six years. The fact that about 49 per cent of our start-ups are from Tier II and Tier III today is a validation of the tremendous potential of our country’s youth,” the release further emphasises.

Shifting gears 

The government’s assertion of rapid fire expansion of the start-ups eco-system in the last over half a decade is endorsed by several reports and stakeholders. A report pegs the total investments flowing in the new age businesses in India in the vicinity of $70 billion during 2014-20.

“Over the past four years, the number of unicorns has been increasing exponentially, with a whopping 66 per cent y-o-y growth in the number of other unicorns added every year. This very year, on 29 June 2022, India became a country with 103 unicorns, with a total valuation of $335.8 billion. We are right now in an excellent phase, when India is becoming a powerful start-up ecosystem,” observes Shyam Sundar Singh, co-founder & director, DeHaat. In terms of fund raising, 2021 has clearly been the best year, as 44 start-ups attained unicorn status with a cumulative valuation of $93 billion. 

But it is this valuation system, something that has been a key calling card of the start-ups everywhere, which is under threat now. The word on the start-up street is: investors are now asking the entrepreneurs to shift gears and adopt unit economics business model (the direct costs and revenues associated with a business model on a per-unit basis) and a better corporate governance regime.

There has been a perceptible slowdown in fresh fund raising this year, forcing many big names of the start-up space to resort to modest level layoffs. As per data compiled by global layoff tracker in start-ups layoff, 43,399 start-up employees have been laid off across the world since April this year. Over 13 per cent of these were fired by Indian startups. This is obviously one of the pitfalls of slowdown in capital raising. 

  • Over the past four years, the number of unicorns has been increasing exponentially, with a whopping 66 per cent y-o-y growth in the number of other unicorns added every year

During 2021, the Indian start-up ecosystem had seen fresh capital infusion to the tune of $42 billion. And, while the first quarter of the current calendar year was equally impressive for them in terms of capital inflow, the months of April and May saw a steep fall. In May, the total fund raised stood at $1.6 billion, which marked a 53 per cent decline vis-à-vis the previous month.

“Recent investor sentiment has been tepid due to global macro-economic factors, including geopolitical tensions, monetary policy tightening public market slump, especially in the US, and the underwhelming performance of some new-age companies on the bourses. Increasingly PE and growth investing firms are looking more at the profitability roadmap and efficiency metrics while evaluating the investment prospects,” points out Suhail Sameer, CEO, BharatPe. 

But stakeholders in the fray, mainly part of the top bracket of the eco-system now, do not feel that current troubles will brew into a serious existential crisis. At the most, it is being viewed as transitional pangs, which will make the start-up entrepreneurs more agile and efficient in managing their respective shows.

“The rapidly changing environment has set new challenges for the Indian start-up ecosystem but businesses that are sustainable, scalable and agile will survive and thrive. We are increasingly witnessing this trend in the Indian start-up ecosystem, and I am confident that these start-ups will continue to contribute immensely to the India growth story,” asserts Sujeet Kumar of udaan.

“I believe that a lot of unicorn start-ups have scalable business models and hence, will set new milestones in terms of growth in the times to come,” adds BharatPe’s Suhail Sameer. Observers, however, believe that successfully bearing this transitional pang would be easier said than done. The change in operational modalities is likely to expedite the process of  separating men from boys of this ecosystem which, nobody doubts, will have a critical role in the country’s future economic growth.

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