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Chander Sawhney

Chander Sawhney, Partner & Head - Valuation & Deals, Corporate Professionals

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Why Startups are Failing in India

The trend of investments has remained difficult for start-ups since 2016 and is still continuing in 2017.

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In 2015–16, we saw launch of as much as four start-ups a day and that’s a big number. Thanks to this, we are now on third position when it comes to number of start-ups. But most of these starts-ups failed to take-off in business after having raised funds. It is estimated that close to 90 per cent of the start-ups in India have failed within their two years of existence. Some of the biggest numbers of these casualties are in such as e-commerce, logistics and food technology. Over estimating the market potential, lack of innovation and over-crowding of the market are some of the reason that has led to the closures of these start-ups. The e-commerce casualties included online lifestyle store Fashionara and fashion marketplace DoneByNone. Dazo, Spoonjoy, and Eatlo failed in the food tech space. Other prominent failures were recruitment marketplace, marketplace for leisure activities, Tushky, and on-demand laundry services Tooler.

Many e-tailors have reported decline in number of orders significantly as they cut discounts leading to drop in their GMV raising eyebrows on their fresh funding rounds and valuations. Start-up funding has dried up with investors, especially when the venture is looking turn profitable. The sanity is back with focus on having a business model with stable profitability. This will eventually be driving more M&A and consolidation in this space.

The trend of investments has remained difficult for start-ups since 2016 and is still continuing in 2017. Venture capital and private equity investments are down 60% in 2016 to $2.76 billion, down from $ 6.91 billion in 2015. Deal volume fell 31%. Falling investment has also cut the next round of funds for start-ups, which is crucial for growth. This in turn is putting start-ups on the ebb. However, serious investor are making smaller rounds of funding but the process of investment is getting longer, thus hampering the projected growth for these companies.Startups big and small have already felt the withdrawal pangs from these investors. Flipkart is struggling to raise funds and saw its valuation slashed repeatedly. Japanese giant SoftBank wrote down US$550 million in its biggest India investments, Snapdeal and Ola.

The obvious reason for the fall in private equity funding or venture capital to start-ups is closely linked to fall in valuations. In the global markets till 2015, Indian digital retail and e-commerce companies and their valuations were being closely linked to the soaring valuation of US tech start-ups and investors are under the fear of missing out. The online retail companies were relying on a different metric of valuations – "GMV" gross merchandise value which is defined to indicate total sales value for merchandise sold through a market place over a period. The GMV was then multiplied by a multiple (x times) to get the Valuation of the entity. New norm is the single digit pre-money valuation now. B2B is now back to action as business customers are more likely to stay once they get value.

The reason is simple – all start-up’s want to be in profits at the earliest and thus are only focusing on their core competencies now. This is leading to closure of non-core businesses which are not expected to get profitable in near future. As there was no dearth of Investor’s money, so multiple businesses got opened with mass hiring across verticals, but now with question of unit economic in all ventures, most of these operations are shutting down leading to mass lay off’s.

There hasn’t been much movement on the government’s Start up India programme also. SIDBI was acting on behalf of the government but it was allowed to invest only 15% in a fund. The remaining amount was to be brought in by the VC’s who have not been able to raise funds on their part in this difficult market conditions, leading to negligible disbursals to start up’s. It is understood that the government is under process to relax these norms and may also bring other institutions like LIC etc. to fund a part of such funds reducing the limits on part of VC’s.

India is still a nascent market and hence has, hesitance to accept new ideas, opportunistic founders and complete lack of clarity on the user groups. However, still many of those start-ups have managed to scale up their business especially in areas which are niche in technology and face fewer competitions.

Now, the question arises that how Startups can reduce the problem they are currently facing right now. The startups must focus on their core business areas where they have created expertise over time. They must focus on Unit Economics of their products thereby coming in profits at the earliest. Also, startups should focus on B2B businesses rather than focusing just on B2C businesses which require a lot of cash burn for customer acquisition and marketing.

As many startups have already begun doing the same, this has led to mass downsizing of teams but the maturity of the startup ecosystem has seen them getting absorbed in other Startups which have more availability of capital and focus on sustainable biz models. Startups must also do innovation in solving key problems of India, rather than just focusing on e-commerce businesses.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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