VCs sound the alarm bells
An ominous ring of the past is sending shivers down corporate spines. Is it the end of good times?
On an early October day in 2008, Sequoia Capital, the benchmark venture capital firm the world swears by, called an emergency meeting of its entrepreneurs, including Alfred Lin – a partner at Sequoia and a former executive at Sequoia-backed Zappos.
Lin and others heard from a handful of partners and sat through a presentation on the worsening financial crisis and the measures their businesses could take to blunt its effects. The first slide had an image of a tombstone that read “R.I.P. Good Times.” The weeks leading up to the meeting had, by then, seen the collapse of Lehman Brothers, the bailout announced, and the worst week of losses in the history of the Dow Jones.
On May 16, 2022, Sequoia made another presentation that had the echoes of its 2008 deck – it has sent shivers down the spines of even the toughest corporate leaders in the world.
A roller-coaster ride
A confluence of crisis is sweeping through the world – the Russian war against Ukraine creating an energy crisis, a supply chain disruption triggered by the resurgence of COVID-19 in China, world-wide inflation, and now a looming global food crisis. Each crisis is feeding on the other and sending shockwaves across several industries – from semiconductors, automobiles, batteries to the venture-capital (VC) fuelled high-octane start-up ecosystem that flourished during the pandemic.
Riding high on astronomical valuations that captured the public imagination, markets were sold stories of the future. That attracted trillions of dollars of VC funds into start-ups. The exuberance of 2021 saw VCs and private equity (PE) funds pump around US$38 billion into Indian start-ups. India became the third-largest start-up ecosystem in the world after the US and China, according to the Economic Survey report of the Government of India. A record 44 Indian start-ups achieved unicorn status in 2021, taking the overall tally of start-up unicorns in India to 83, with most in the services sector, the survey showed.
But yesterday’s valuations are now a fiction. Companies like Zomato, Nykaa, CarTrade, Policybazaar, and others have witnessed a 40%-60% dip in their stock prices while Paytm was trading at a quarter of its IPO issue price, towards the end of March 2022.
Stark figures for hard times
Sequoia Capital – the venture capital giant known for investments in tech titans such as Apple, Uber, and Google – shared a 52-slide presentation with 250 founders on May 16 over Zoom that warned of a “crucible moment” of uncertainty for the venture market due to inflation, the markets, and geopolitical issues. Sequoia joins a chorus of VC firms and investors on Twitter warning founders about the current macroeconomic environment.
Per research by Bain & Company (in partnership with the Indian Venture and Alternate Capital Association), the number of VC agreements is expected to decline this year. Indeed, according to a Crunchbase analysis, worldwide VC financing fell by US$10 billion months over a month in February (US$52 billion). According to the study, early-stage and late-stage financing declined by 17% and 19%, respectively.
SoftBank Group Corp has marked down its investment in Paytm parent One97 Communications to US$800 million, its annual report showed. The Japanese conglomerate invested US$1.4 billion in Paytm via its Softbank Vision Fund 1, which has now come down to US$800 million as on 31 March 2022, owing to a steep drop in Paytm’s valuation. IPOs of several start-ups have been deferred. Boat, a direct-to-consumer (D2C) brand, Oyo Hotels & Homes, Snapdeal, and PharmEasy are delayed.
The start-up exodus
Employees are also quitting start-ups. EdTech firms like Unacademy and Vedantu laid off hundreds of employees. Recently, other companies including Meesho, Trell, Furlenco, OK Credit, and Lido Learning too have announced lay-offs as the ecosystem experienced a drying up of large funding this year, compared to 2021. Indian start-ups laid off 6,900 employees in the first four months of 2022. In May alone, unicorns like Vedantu and Cars24 fired over 1,200 employees.
In a protest against the company asking its employees to resume reporting from their offices in Gurgaon and Mumbai, employees of WhiteHat Jr, the coding start-up of Byju’s, had resigned en masse.WhiteHat Jr has posted a massive INR1,690 crore loss in the financial year 2021 while generating an operating revenue of INR484 crore in the same period.
One of the major reasons for EdTechs cutting costs drastically is the dwindling demand for online education as offline educational activities resume post-pandemic.To attract students, Vedantu recently launched Ai Live, an interactive platform to help bring down the fee structure for a one-year-long course for grades 6 to 12 from INR22,000-25,000 a year to INR5,000 annually.
Around 40-50% of workers leaving start-ups are getting hired by IT firms, consulting and product companies as well as global captive centers, according to talent consulting company Han Digital. In fact, one in five people left start-ups voluntarily to join the IT-BPM sector over the last year.
According to the latest report by IVCA-EY, Indian start-ups raised only US$1.6 billion in April 2022. This is almost half the capital raised by the same ecosystem in April 2021. To make matters worse, no company entered the unicorn club last month, whereas April 2021 had flagged off the momentum of unicorn creation with eight new additions. That phase in April 2021 saw the birth of start-ups like Meesho, PharmEasy, CRED, Groww, ShareChat, Gupshup, Chargebee, and Urban Company. This year, there was none.
Quarter-on-quarter data points to a slowdown in Indian start-up funding too. From the record quarterly funding of US$17.1 billion in Q3, the tally fell to US$14.5 billion in Q4 2021 and then to US$11.8 billion in Q1 2022. The IPO parade has come to a standstill – just showing that even slightly mature start-ups are feeling the heat of the global economic crunch.
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