India’s unicorns have cut jobs and closed units to conserve scarce capital

India’s biggest startups are going thrifty amid a new reality where capital is hard to come by.

At online education start-up Vedantu, one of 44 companies to surpass a $1 billion valuation last year amid a funding frenzy, CEO Vamsi Krishna told employees on April 18. Vedantu will lay off 424 executives, spending cut for new user acquisition and eliminate “non-core” initiatives to maintain enough capital for 30 months. The layoffs came weeks after another 200 jobs were cut.

Cars24, which made $3.3 billion in used car sales, has cut 600 jobs. Meanwhile, Meesho, a $4.9 billion e-commerce startup, has asked 150 employees to leave.

Online education start-up Unacademy, which has skyrocketed in value to $3.4 billion, has lost 1,000 people’s jobs, while 200 have left Fulenco, a furniture-rental start-up. Video trading startup Trell – which is under investigation over alleged financial irregularities – has laid off around 300 employees and healthcare startup MFine has laid off around 500.

“The coming days will be more painful for growth-stage companies,” said an investor at a growth capital provider. “A lot of these companies look fragile even though they’ve raised a lot of money at very high valuations, and therein lies the problem — they still look fragile.”

Grocery delivery start-up Swiggy, which was valued at $10.7 billion earlier this year, suspended its daily needs subscription service in five of the six cities in which it operated in early May, despite it had scaled the business from about 6,000 to 200,000 daily orders by mid-2018. In an email to employees explaining the closure of the unit, Swiggy hinted that large volumes alone would no longer cut it.

This article is from Nike Asia, a global publication with a unique Asian perspective on politics, economics, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section offers in-depth coverage of 300 of the largest and fastest growing public companies from 11 economies outside of Japan.

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“While we are now an inalienable part of our consumers’ lives, unfortunately we have yet to chart a clear path to profitability,” the group said. “Today we find ourselves in a situation where we end up investing a lot of time and money in running the company – and thereby distracting ourselves from our primary goal of making the business market fit.”

Driving service company Ola is also reducing its food and grocery delivery services.

Collectively, these startups have raised about $4 billion since January 2021, with Swiggy accounting for about half of that. All are in the red zone.

Shailendra Singh, chief executive of Sequoia Capital India, wrote on Twitter in mid-May that board meetings “now focus on efficient growth, sustainable single economy and pragmatic capital allocation.” “Frugality is back in fashion,” he added.

Graphic on venture capital funding of Indian startups

From downsizing the workforce to shutting down unprofitable businesses, startups are pulling out all the stops to save for a rainy day, while investors are growing cautious amid the global meltdown in public markets. This is a big change from last year’s aggressive expansion, when startups splurged on marketing and hired high-paying employees while enjoying a funding boom.

India’s top 50 advertisers in 2021 included 15 startups operating in markets such as online education, financial services, fantasy sports and cryptocurrencies. Some managed to outperform well-known names such as Reliance Industries, Procter & Gamble, Google, Mondelez, ITC, Coca-Cola, PepsiCo, Nestlé and L’Oréal.

According to data provider CB Insights, Indian startups raised $8 billion in 520 deals in the January-March quarter, down 20 percent from the $10 billion pumped in the October-December quarter.

“Last year people struggled to say yes, but this time more people are finding a reason to say no,” said Shivakumar Ramaswami, founder and director of investment bank Indigoedge. “Most people are afraid of the price [a deal] in this market because they don’t know where the bottom is.”

As a result, the bar for investing is much higher this year. “Investors who valued startups by revenue multiple last year now want to value them by net earnings multiple,” said one investment banker. “It’s a function of the broader markets.”

U.S. tech stocks like Peloton, Netflix, Palantir, Rivian, Snowflake, Robinhood and Opendoor have borne the brunt of the aggressive sell-off, with the Nasdaq plummeting 28 percent year-to-date.

Closer to home, India’s benchmark stock index has fallen 11 percent over the same period. Tech stocks like Zomato, Paytm and Policybazaar, which went public last year, are all trading below their issue price. Retail investors avoided shares in logistics start-up Delhivery, which launched its IPO this month.

Zomato driver

Like other tech companies, food delivery start-up Zomato, which was listed last year, is now trading below its issue price © Dhiraj Singh/Bloomberg

The slowdown is unlikely to weaken anytime soon, although a number of venture firms – including Accel, Elevation Capital and Blume Ventures – have raised new funding over the past year. Sequoia Capital has received a commitment from investors for a whopping $2.8 billion to be invested across India and Southeast Asia, but has delayed closing the fund due to alleged financial irregularities at a portfolio company.

“Understand that the poor public market of technology companies is having a significant impact on VC investing,” Silicon Valley incubator Y Combinator said in a note to its portfolio companies. It added that funds would find it harder to raise money and that investors would expect more “investment discipline” if it were successful.

“As a result, even top-tier VC funds with lots of cash in economic downturns slow down their capital deployment (lesser funds often stop investing or die),” Y Combinator said.

Prayank Swaroop, a partner at Accel, says companies have to be “exceptionally good” to raise capital. “The era of free money stands still until this uncertainty is over.”

A version of this article was first published by Nikkei Asia on May 24th. ©2022 Nikkei Inc. All rights reserved.

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