Analysis: Zombie unicorns: Indian startups go from feast to famine

Quotient Technology

18/05/2022 09:17

* Indian startups brace for tough future after blockbuster
year
    * Global market rout, Indian listing flops inspire caution
    * VC India Quotient tells firms to cut expenses, maintain
cash
    * Slowdown bodes ill for 60,000 startups in India

    By M. Sriram
    MUMBAI, May 18 (Reuters) - The valuation of Meesho, the
Indian e-commerce rival of retail giant Amazon, more than
doubled last year to $5 billion, after marquee investors such as
SoftBank and Fidelity pumped in hundreds of millions of dollars.
    They aimed to ride a boom in India's tech startups, which
raised a record $35 billion in new funds in 2021, but the tide
has since turned, as corporate governance concerns loom large
for investors facing a new uncertainty in global markets.
    "We haven't seen a slowdown like this in at least five to
six years. It is going to be brutal," said Anand Lunia of
venture capital firm India Quotient, an investor in more than 70
startups since 2012.
    "I expect to see a lot of zombie unicorns. Companies which
became unicorns but have no business models have stopped hiring
- they are not dying, but will become irrelevant."
    Now Meesho is trying to raise debt and cut expenses after
efforts to raise fresh funds of $1 billion floundered, making
investors wary of its monthly cash burn of $45 million and stiff
competition, two people familiar with the talks told Reuters.
    Meesho did not respond to a request for comment.
    But its struggles are among the first signs of a painful
future awaiting many Indian startups. 
    Plummeting Indian tech stocks are a worry, but investors
spooked by fears over corporate governance are stepping up
scrutiny during due diligence efforts, which delays funding
rounds, two venture capital executives said.
    And there are concerns that valuations in India are already
too high, even when startups' business models are being led by
discounts and there is a bleak outlook for revenue, they added.
    That could slam the brakes on the unprecedented growth and
dull the lure of Indian startups.
    Eight venture capital and startup executives said fears were
growing that a funding crunch would lower valuations, leaving
less cash to achieve growth and bring job cuts.
    Lunia said he had told companies in which his firm has
invested to ensure they hold liquid cash sufficient for at least
18 months, reduce spending and headcount, if necessary.
    Just last week, BharatPe, an Indian payments startup backed
by Sequoia Capital, said it would overhaul governance practices
following an internal review.  urn:newsml:reuters.com:*:nL3N2X21C4
    Another startup Vedantu, which offers online tutoring
courses and is backed by Tiger Global with a valuation of $1
billion, laid off 200 staff this month in a "load rebalancing"
move it said was based on growth expectations. 
    Typically, Tiger has targeted bigger Indian startups, but it
has now told bankers it will only consider deals involving those
with a valuation of less than $200 million, in a bid to reduce
risk, said two executives with direct knowledge of the matter.
    Tiger did not respond to queries from Reuters.
    
    "PREPARE FOR THE WORST"
    With more than 60,000 startups in India, Prime Minister
Narendra Modi has labelled the current decade a "techade", in
which he added, "New unicorns are coming up every few weeks."
    However, April was the first month in more than a year that
India had no new "unicorns", a term for startups with valuations
above $1 billion.
    Indian startups raised $5.8 billion in March and April, down
about 15% from the corresponding period last year, data from
Venture Intelligence shows.
    At a recent private dinner in the southern tech city of
Bengaluru, executives of U.S.-based Insight Partners, which
manages more than $90 billion in assets, told Indian founders it
would target more early stage companies and invest less because
of the global tech rout, said one of those who attended.
    Insight did not respond to a request for comment.
    Many tech companies globally have suffered in recent weeks
as the Ukraine conflict and rising interest rates hit investor
sentiment. 
    Japan's SoftBank, which is India's biggest tech investor,
with more than $14 billion in investments, has reported a record
loss of $26.2 billion at its Vision Fund investment arm.
 urn:newsml:reuters.com:*:nL2N2X40DK
    November brought India's first disappointment with a tech
IPO when SoftBank-backed payments app Paytm  PAYT.NS  crashed
27% at its debut, triggering criticism it had overvalued the
company without prioritising profitability.  urn:newsml:reuters.com:*:nL4N2SA1SI
    Paytm has plummeted a further 62% since. And while Indian
food delivery firm Zomato  ZOMT.NS  and beauty retailer Nykaa
 FSNE.NS  had blockbuster listings, their shares are down 67%
and 43% from their peaks, respectively. 
    Three Indian startup founders said their investors recently
told them the days of easy money were over and they must now
show a clear path to profitability.
    The message, one of the founders says, is clear: "Prepare
for the worst, hope for the best."

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Paytm stock performance since initial public offering Paytm
stock performance since initial public offering    https://tmsnrt.rs/3FTo41a
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 (Reporting by M. Sriram in Mumbai; Additional reporting by
Abhirup Roy; Editing by Aditya Kalra and Clarence Fernandez)
 ((Sriram.Mani@thomsonreuters.com;))