Will the economic slowdown bite the Indian startup ecosystem?

Job cuts, hiring freeze, factory shutdown, and suspension of production are some of the headlines staring at us as the Gross Domestic Product (GDP) growth rate of the economy slipped to five percent for the first quarter of 2019-20, the lowest in over six years.

Sectors including automobile, real estate, financial services - non-banking finance companies (NBFCs) in particular, and manufacturing have shown signs of impact from this economic slowdown. Now, it remains to be seen whether the thriving Indian startup ecosystem will also come under the cloud.

The jury is still out on this as these are still early days. However, there is also a sense of unease on what the future holds for Indian startups.

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Category matters

The startup ecosystem in India can be broadly divided into two categories. Those that are just building their new companies while the others that are out there to gain a greater market share. In parallel to this is the funding environment, which can vary depending upon the growth stage of the company.

Rutvik Doshi, MD of Inventus (India) Advisors, a venture capital firm, says, “The economic slowdown will have a trickle down impact on startups.” He adds that startups focussed on the India market providing various kinds of goods and services may be impacted due to lower spending power.

Others in the industry feel that given how Indian consumers normally purchase low ticket price items online, the ecommerce sector is unlikely to be impacted by the economic slowdown.

“We are talking about an Ola or Uber ride, or ordering on Swiggy. These are not high-value purchases like cars or apartments. So, there may not be an impact,” an investor told YourStory on condition of anonymity.

An entrepreneur, who operates an online discount site and does business with Flipkart and Amazon, said, “Until now, there has been no visible change in our business. Our growth remains at the same level as it was last year,” he says, though adding that one cannot really say about the near future.

Market share concerns

For many early-stage startups with a limited market share, the impact of the economic slowdown may be minimal. But it is not a similar scenario for those who command a sizeable chunk of the market. Here, the economic slowdown is likely to affect their overall growth, say industry observers.

However, others believe that the economic slowdown may not have any impact on startups in India at all.

“If one looks at ecommerce, online delivery or cab hailing, it has been just a shift in market from offline to a lower priced convenience. It does not add to any economic activity,” says V Balakrishnan, Chairman of Exfinity Ventures, a B2B focussed venture capital firm.

Funding impact

Amidst this talk of economic slowdown, one of the most critical elements is funding for startups.

Rutvik says, “Slowdown generally does not impact the early-stage ecosystem as investments are done keeping in mind a five to seven year cycle. So, there is unlikely to be an impact.”

Though, he added that the same cannot be said about late-stage companies where funds come in looking at shorter duration of investment period.

“The slowdown may impact late-stage funding as it will have a bearing on the investors ability to exit or make returns on their investment,” explains the investor.

The Indian startup ecosystem is heavily dependent on foreign inflows and any changes in the overseas markets could put some brakes on the flow of money. It also depends on the direction of the public markets.

Navin Honagudi, Partner at Kae Capital, says “Public (listed market) and private market (startups) don't necessarily have a strong correlation. For example, in 2016-17, when the private markets was down, the public market was zooming ahead. But that doesn't mean that private market is completely insulated from the bigger macro factors. We could expect some slowdown even in private market.”

At present, the global stock markets are in no state of buoyancy and the same is reflected in India too. This could bring in some caution among investors.

Balakrishnan says, “High networth individuals (HNIs) who have lost money in stock markets may become more cautious and this could impact the angel funding stage of startups in India.”

Future - bright or bleak?

Given the current environment, funds that have already raised capital are most likely in a safe zone, but the same cannot be said about the ones with similar plans.

On the capital raising plans of startups, Manoranjan Sharma, economist and former General Manger of Canara Bank, says, “The slowdown may not impact the capital-raising ability of startups as they do not need heavy capital. Their fund raise will depend on various other factors such as nature of their business, competitive scenario, and risk factors.”

As the economy looks to emerge out of the slowdown, with automobile companies like Maruti Suzuki and Ashok Leyland forced to cut down production due to lack of demand, the new-age economy has not really offered any hope.

Navin says, “One of the factors for the auto market slowdown is the rise of shared economy that is generally provided by startups. So, there are two cases here - traditional economy is slowing down and shared economy is getting bigger.”

However, he agrees that the new economy has not been able to completely compensate the loss incurred by the traditional economy.

As the country goes into the festive season from next month, much hopes will ride on improved consumer sentiment and their buying behaviour. And, startups play a big role in this segment.

Manoranjan says, “For now, the indicators are not very good. The upcoming festive season are the times when sales automatically pick up.”

The litmus test for the Indian startup ecosystem will be the forthcoming special festive sales in October from the ecommerce biggies like Flipkart and Amazon. If the sales overtake last year’s number then all is well.

(Edited by Saheli Sen Gupta)

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