In the last two years, the Indian startup ecosystem has seen an extraordinary rise in funding, with all types of startups receiving millions of dollars in funding, including ed-tech, fin-tech, and med-tech, and just in the year 2021 alone, the Indian start-up ecosystem saw $41.4 billion dollars in funding and the rise of 42 new unicorns.
However, as soon as 2022 began, bad news began to pour in from all directions; the losses of these companies have been piling up; mass layoffs have begun, with over 9000 employees being laid off from reputable companies such as Vedantu, Cars24, Ola, Unacademy, and many more. Funding has slowed, and even well-funded firms are going out of business. So the question arises, is the gold rush of Indian start-ups about to come to an end? How will this bizarre startup crash affect India’s business ecosystem?
To comprehend, we must first recognize a similar bubble that occurred in the past, and then we will be able to connect it to the future. The dot-com bubble occurred in the United States of America in the 1990s, and during this time, computer penetration in the US began to reach extraordinary levels, with the personal computer market growing by a hundred percent every two years.
Just like today we have startups popping up all over the country, internet companies were flooding the American markets back then, and because most of these companies were website based, they had a dot-com suffix attached to their name, and just like every other Indian startup is raising millions of dollars today, back then investors were so bullish on dot-com companies that even if they didn’t have a business plan, even if they didn’t have a product, even if they only had a website. As a result of so much money pouring into the market, strange things began to happen.
- Every other startup started commanding a million and billion-dollar valuation.
- Many of these companies went IPO and set record-breaking openings.
- Market went optimistically high on investor sentiment.
- Lastly, barely any of these companies were profitable.
This terrifying dot com bubble ballooned for ten long years until 2000, and later from 2001 onwards, just like any other bubble, it abruptly began pulling out of these startups one by one. Soon after, all million-dollar funding dried up, thousands of employees were laid off to cut costs, many million- and billion-dollar startups failed, and investors lost $5 trillion in total wealth from 2000 to 2002. This was caused by the dot-com bubble.
Similarly, 2021 was the peak of funding for many start-ups in India, but starting in 2022, we have seen start-ups shut down at the same rate they were formed, resulting in mass job losses. According to some startup founders, one of the major reasons for these massive layoffs has been investor pressure on profitability and efforts to reduce cash burns. Experts believe it is a combination of several factors, beginning with the Paytm-Zomato debacle and continuing with inflation, which makes borrowing expensive. They believe that, even if founders are reluctant to admit that funding may decline in the coming months, investors are taking precautionary measures.
As seen with the dot-com bubble, start-ups are riding high on market sentiment and are still valued significantly higher than they would have been otherwise. The valuation of companies will be further reduced, as will the subsequent round sizes. All of this will have an impact on VC/investor exits through public listings, with several IPO-bound companies entering a wait-and-see mode.
Even though there is a significant slowdown, a good innovative company will always continue to receive funding and grow exponentially; much like some of the incredible companies that grew during the dot-com bubble, such as Amazon, eBay, Priceline, and even Google. All of these businesses not only survived but also evolved into a revolutionary group of businesses. It is now up to us, “the investors,” to decide which start-up has a unique competitive business model with a bright future ahead.
Written by: Suraj Bansal
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