Layoffs, reduced IPOs, suddenly scarce funds: “The Backbone of New India” exposes some of the country’s fundamental shortcomings.
Indians were rightly proud of the dynamics of our startups. Several government programs – Digital India, Startup India – should revitalize this sector. Senior officials have pointed out that “visionary and shrewd leadership” “has made India the third largest startup ecosystem [in the world]”.”
Prime Minister Narendra Modi himself has declared that “Startups will be the foundation of New India” and even officially declared a “National Startup Day”. (January 16 for those celebrating.)
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In the cold, harsh light of 2023, however, much of this enthusiasm seems misplaced, or at least exaggerated. According to some estimates, 92 companies in the industry have laid off more than 25,000 employees since the beginning of the year. Many people considering an IPO put their bids on hold and lowered their expectations of how much they hoped to raise.
Hospitality Services Oyo Hotels, for example, reportedly reduced the size of its IPO to less than half of its original estimate of $1.2 billion.
In other cases, large financial firms have halved the value of some of their investments. There are fewer and fewer investors, so much so that a recent networking conference was thrown into chaos when dozens of entrepreneurs showed up and investors were scarce. .
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It’s not entirely surprising that an industry so dependent on the open spigots of indulgent investors should struggle in a world of rising interest rates.According to some estimates, the level of funding for the industry fell by 75% in the first quarter of this year compared to the same quarter in 2022. Late-stage startups looking for funding to expand their operations have a particularly difficult time raising funds. .
Higher inflation also means lower profit margins – for those in the industry looking to make a profit. Incidentally, inflation also overshadowed the growth prospects for real consumption of the reference targets. It’s difficult to project optimistic growth scenarios when your customers are exposed to high prices for basic needs.
India’s
startups have absorbed so much talent – and attention – that it’s hard to imagine the sector staying depressed forever. Still, there are at least three lessons we in India can learn from this crisis.
First, we must not underestimate the importance of remaining attractive to global venture capital. With global finance looking the other way, smart and ambitious Indian companies have far fewer options.
Not all sectors can be inflated with existing institutions or public money.It is now rumored that Indian banks have quite absurdly asked the central bank for a special funding line for startups. Hopefully the Reserve Bank of India will ignore these calls.
First, we must not underestimate the importance of remaining attractive to global venture capital. With global finance looking the other way, smart and ambitious Indian companies have far fewer options.
Not all sectors can be inflated with existing institutions or public money. It is now rumored that Indian banks have quite absurdly asked the central bank for a special funding line for startups. Hopefully the Reserve Bank of India will ignore these calls.The risks of high growth must be borne by specialized financial service providers and not by state guarantee funds or banks. There are limits to what the state can do. Second, we need to be realistic about the size and resilience of the Indian consumer market. While we may be the largest country in the world right now, we’re still a long way from being the largest market, if ever.
Some Indian startups sold investors exorbitant expectations based on unrealistic beliefs about who could afford their services.Only a fraction of India’s 1.4 billion people are global middle-class consumers. Indian fintech companies, for example, are fond of pointing out the near-universal reach of new payment platforms. However, only 6.5% of users of these platforms account for almost half of all transactions.India’s domestic consumer market is neither large enough to justify the valuations of our startups, nor large enough to allow our economy to grow at the pace we need. Both Indian startups and companies from other sectors of the economy need to expand their ambitions beyond national borders. Finally, let’s not assume that success is our right. Many of our flagship industries – IT services, generics, automotive components – either fail fatally or are at risk of being caught up in technological, financial or regulatory realities. The start-up industry can at least adapt quickly to changing circumstances.The same can’t be be said for India’s other, creakier champion sectors.
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