8,000 people have recently been fired from startups
According to Business Insider, 8,000 people have recently been fired from startups. They believe this number will increase. Startups that did layoffs include some well-funded ones. Such as MFine from the healthcare sector, Vedantu and Unacademy from the EdTech sector, and Cars24 from the Auto Tech sector. Listening to this news, you might think that these startups are laying people off due to poor performance. But this is the result of a very big problem. This problem has been ignored for a long time.
What’s happening with the Indian Startup Economy
Today we talk about what the problem is and how big it is and how big is the impact? The story of Indian Startups and layoffs begins on 18 August 2018. This was the day when Walmart bought Flipkart for ₹1.5 lakh crores. It’s important to talk about Flipkart because it was an unprofitable startup and remains so even today.
When Flipkart was sold in 2018, its losses were around ₹2,063 crores. The previous year, it was ₹245 crores. Despite such losses, when Walmart bought Flipkart the Flipkart investors made huge profits. Soft Bank sold 99.95% of its stake to Walmart and made a profit of ₹10,000 crores. It was the same for many other investors. Flipkart’s case is special because the company was not profitable but the investors made money. The same thing happened to Myntra investors when Flipkart acquired Myntra. After this, the Indian Startup story started changing and it became a feature for Indian startups. Shark Tank India’s Aman Gupta also believes lately, the companies that had been addressing the big market were helped with fundraising.
The investors’ focus changed. Instead of profitability, they picked companies that can be acquired by someone else so they can make money. So revenue and profit were slowly sidelined and the buzz was about the Daily Active Users (DAU) Monthly Active Users (MAU) and for e-commerce, it was Gross Merchandise Value (GMV). Stock Market investors were shocked when they saw that many e-commerce companies were not valued based on revenue and profits. Instead, it was GMV, which means the number of goods sold.
The cost of the number of goods sold on Flipkart. Flipkart’s commission and profit were not considered at all. This was shocking to a lot of people from the start. But at the time, these things were working very well.
You’ll be shocked to know that a rat race started soon after. In this rat race, the startups that wanted to raise funds knew that talking about profits and revenue wouldn’t be helpful but if they focus on the active users and the growth then they could find funding. Because investors were looking at it that way too. Slowly, startups began to focus on increasing DAU, MAU and transition value. Once these were high and there was funding there was more pressure on increasing these numbers. Although there was expansion, most startups didn’t have value generation. This created problems with revenue and profit. In order to acquire more customers, they had to give discounts.
The side effect of the discount was that people started to choose platforms with higher discounts. When the company stopped giving discounts, people stopped going there because they weren’t using the platform for its features but for the discounts and cashback.
When Paytm stopped giving direct cashback, a lot of people stopped going to their platform. Although there are other reasons for Paytm’s reducing userbase this was one of the big reasons. Things were going well for investors because they believed in The Greater Fool Theory. The Greater Fool Theory says that the value of an asset will keep increasing until you find a greater fool and sell the asset.
If a startup’s valuation is $10 million investors started to fund it and focused on increasing its valuation to $100 million. Instead of focusing on when it will become profitable. Many investors started becoming the greater fools themselves when they gave a lot of startups too much value. In this greater value theory, a lot of users became active.
The competition increased. Due to this, many startups didn’t have any userbase or revenue model but raised ₹60-₹70 crores in funding. Now they are figuring out what to do. In order to make a startup successful team and employees play an important role. But you need to get correct and relevant education and stay constantly evolved which makes it hard for the startup to drop off.
According to Data Analytics Company Tracxn, Out of all the unicorn startups in India, 77% of them are not profitable. Without earning even a 1₹ in profit their valuation is ₹7,500 crores. It might sound shocking to you but this had become a norm. All this was going well when on 18 November 2021 there was a twist.
On this day, Paytm shares were listed on the stock exchange and there was a 27% fall in the share, on the first day. Paytm’s offer price was ₹2,150 and today the share price is ₹615. The same thing happened with Card rate’s IPO last year and their share price decreased by 60%. So investors started to understand that the private market’s overvalued prices were not going to work in public markets. So almost all startups whether their day-to-day operation or expansion is dependent on funding. But the Paytm IPO fell drastically and investors realised that the greater fool theory will not work in the public market anymore. Due to this, the private market investors contemplate a lot before funding startups, whether they can profit or not.
That’s why there is a winter period for startups where private market investors such as venture capitals and private equities are investing carefully. When startup IPO failed in India and the US a big group that invests in startups, Soft Bank Group had a $13 billion in FY 2021-22. Most of the loss is due to decreasing valuation. When private valuation can’t sustain in IPOs the exit is hampered for the private investors.
In 2021, in India, 40% of the VCs took exit through IPOs. According to CB Insights, funding given to Indian startups in the first quarter of 2022 was $8 billion. In the second quarter, it has reduced to $3.6 billion. Among these tech startups, Tiger Global, a hedge fund is investing aggressively in Indian startups.
They recently had a $17 billion loss. Particularly due to the tech startups’ valuation decreasing. Japanese giant Vision Fund the last financial year, had a $27.4 billion loss. It is the Fund’s greatest loss. You might not know, but the money in the Indian startups, 80% of it comes from the US.
When interest rates increased in the US, it impacted this whole process. Because when interest rates are low in the US, their investors look for opportunities in India. Or they invest in Indian startups or equity markets. When the interest rates are high, the flow decreases. But Bengaluru based Venture Capital Firm Inventors Capital’s Managing Director, Parag Dhol says that funding coming into India will get affected when the rates are higher. So according to him, it is not getting as affected right now. Investors are not able to find greater fools in the market so they are pressuring startups to make profits. Many large startups in India that have been operating for many years such as Ola, Snapdeal, and Oyo are still not profitable. If we talk about Oyo in the last six months, they postponed their IPO twice because they know the situation of the public market.
Due to all of this, the combinator has told its portfolio maker to prepare for the worst time and it is the responsibility of the founders to run the company for 24 months without funding. The impact of this problem is that many startups that took a lot of money and expanded without revenue are having to cut down heavily.
This is why there are Tech layoffs and startups are laying people off on different levels. The story doesn’t end here. As the interest rates in the US get higher and in the Indian stock market retail investors will remain unresponsive to unprofitable companies. The companies will have to cut down further. It is also important to understand that is not the only reason for layoffs.
You can see in this Inc 42 report, that there are different reasons for layoffs such as automation and work from home. 1,000 employees resigned from WhiteHat Junior because they were told to work from the office.
Recent data shows that most employees prefer working from home. Does this mean The Great Indian Startup Party is ending? Not at all. It is just that many of India’s retail investors have forced startups that if they don’t focus and make a profit then they have no place in the public market. So everybody is rationalising and focusing on Profit. This is good for the startup ecosystem. In the next few years, you will see fewer unicorn startups but value-generating startups will be more, which will solve people’s problems. So this was about India’s startup ecosystem.
