Caution may become the buzzword for investors before their money goes into startups
Call it the WeWork impact or otherwise, there is a sense of apprehension about a likely course correction with regard to investments coming into the Indian startup ecosystem, where there is going to be a reality check by investors on how their portfolio companies are performing.
The crash in the private valuation of the US-headquartered real estate technology startup WeWork from $47 billion to around $5 billion, and the exit of its Founder Adam Neumann was a rude wake up call for investors, entrepreneurs, and others in the ecosystem. Masayoshi Son’s SoftBank was the key investor in WeWork.
All this is likely to impact India, and might hold some lessons for the startup community as well. Given the interconnectedness among the three major startup geographies of the globe – the US, China, and India, with funds and talent moving across the regions, it will not be a surprise if there is a chain reaction impact. In this context, these dark clouds are likely to enter India.
Impact on investments
Rajesh Sawhney, CEO and Co-founder, InnerChef, who is also a serial entrepreneur and angel investor, says, “As of now, there is not much impact on investment climate in startups in India. However, I believe there will be an impact in 2020.”
One of the main reasons for this course correction is the WeWork fiasco. Rajesh says, “SoftBank had a setback in WeWork, and will be conservative on making large bets. It will also ask its portfolio companies to be conservative and move towards self-sustenance. Other large investors will also take cue from SoftBank and will change their investment strategies.”
This becomes especially true for the business-to-consumer (B2C) startups and companies who are investing a considerable amount of money or burning cash to acquire customers. This was primarily driven through the investments received by startups, and recent losses reported by some of the Indian unicorns is a stark reminder of the situation.
An investor on condition of anonymity told YourStory, “In my recent visit to the Silicon Valley, investors were talking about how the fund flow into Indian startups might be a challenge, especially for the bigger B2C companies.”
The early indication of a perceptible slowdown was noticeable in YourStory’s nine-month funding report for 2019.
“The funding in the startup ecosystem in nine months of 2019 saw a marginal fall of four percent when compared to the corresponding period in 2018. The funding raised during this period amounted to $7.67 billion across 603 deals,” says the report.
Another investor based in Bengaluru, whose portfolio of investments are primarily into B2C startups, says, “It has already started with consumer internet companies struggling to raise money.”
Navin Honagudi of Kae Capital says, “The trickledown effect from the jolt of WeWork has already started for Indian startups, which are looking to raise money. Investors are now keeping profitability in mind even as they look at the growth aspect.”
However, industry observers believe that this is a much-needed course correction as an inflated environment was being built in the ecosystem.
V Balakrishnan, Chairman, Exfinity Ventures, a B2B focused venture fund, says,
“This is definitely a wake-up call. Investors today want to see a sustainable business model from the startups, especially the B2C firms. You cannot keep on guzzling cash and making losses.”
Even Rajesh agrees with this view and says, “Most Indian unicorns are bleeding and their financials are in a mess. Their ability to monetise and create profits is untested.”
In concurrence with the likely course correction is also the likely impact from the broader domestic economy. The numbers on the overall GDP growth rate and the index for industrial production are not exactly rosy. Today, the Indian economy as a whole is staring at a five percent or below kind of economic growth.
This could hit the sentiment of the consumer’s purchasing power, and could have a bearing on the momentum of sales for the startups as well.
“Indian macros are not looking good - many sectors of the economy are hurting badly. This will impact many funds and global investors,” says Rajesh.
How 2020 looks
Given this sentiment and the year fast approaching, it would be interesting to see how 2020 pans out for the Indian startup ecosystem, and what would be the focus of the investors.
Navin says, “2020 will be far more cautious and methodical year as compared to 2019. The investor approach will be to look at startups which have solid business models. This is also good for the ecosystem.”
The general perception is that there is money to be deployed, but there will be more judicious use of capital.
Balakrishnan says, “The velocity of deals is unlikely to come down, but the quantum of investments may become lower.” According to him, the number of deals which is going to be closed is unlikely to be impacted, but there will be abundant caution when somebody is seeking those big cheques.
Industry observers believe it would be prudent for the startup founders to raise capital as early as possible, and conserve this money for the coming winter.
“I do hope that Indian startup ecosystem will be able to deal with this necessary correction. Hopefully, this will not prolong for years as Indian markets are deep and Indian entrepreneurs are resilient,” says Rajesh.
(Edited by Megha Reddy)