In India’s startup ecosystem, decoding the ‘slow’ in slowdown, growing opportunities and an equal amount of dreaming of what a company can be

The Indian startup ecosystem saw a frenzy of funding deals and massive valuations elevating 46 startups to the unicorn status in 2021 alone. While the momentum is not sustained today in 2022, what could that mean for over 50,000 startups in India and all the stakeholders involved in their growth?

Shailesh Lakhani, Managing Director, Sequoia Capital India Advisors says there is no reason for people targeting and selling to India to not be optimistic at this moment. 

“The US had printed a lot of money for several years that led to lots of capital and with the cost of capital dropping globally, there's lots of negative yielding debt around the world. That's changed a lot in the last few months. Much less debt is negative yielding today. So free money available as equity for startups will change,” he explains during a panel discussion on early growth stage trends in India moderated by Syna Dehnugara, Vice President of Brand and Marketing, trica.co, at FoundersFirst 2022.

He believes that startups may have to behave a little differently but the actual economy where most people will likely be doing business is in very good shape. 

“If there's less competition at all levels for investment, talent, or just making general startup noise, I think that's a very good thing. I think it will be great for folks to be building right now,” he says, adding that the signals seen in the Indian economy are all very positive. 

Prayank Swaroop, Partner, Accel, shares that a few important Black Swan events tend to occur every 10 to 15 years which leads to more opportunities than a crisis. According to him, the question is whether the business fundamentals are intact and if there’s a focus on people, solutioning, and capability building. 

“Are we knowing our consumer and market well so that we create a value prop as a competitive advantage or are we just trying to seize a transactional value? And while doing all this, how are we keeping ourselves honest with the profitability and growth,” he emphasises.

Seeking shelter in early stage investment

Sharad Sharma, Co-Founder of iSPIRT Foundation, mentions that early stage funds like Accel and Sequoia continue to be active, partly because spending and consumption by corporates and others have not slowed down. However, it is still a time of caution. 

He further explains, “When companies raise capital, they usually raise for 18 months. This means that they typically have to go out to fundraise in 12 months and today, the next 12 months look very difficult to predict. Hence, investors are having to ask founders to make sure that the money intended for 18 months lasts for 36 months.” 

The funding winter has definitely set in for late stage startups. Investors are playing it safe because the losses are going to be much bigger in late stage companies. Hence, those traditionally investing in India have started to come in earlier, according to Sharad. 

One big change, Prayank points out, is that growth investing has slowed down significantly while momentum-based investing has taken a hit due to uncertainties around the next round of funding for companies burning a lot of cash. While good entrepreneurs will ride through the tides, Sharad says it will hopefully make hiring easier or bring some discipline in the valuation bubble to wash away some of the excesses.  

Regardless of the market sentiment, Shailesh says, “There is still an equal amount of dreaming of what a company can be. People's ambition hasn't changed. There's just a lot more practicality and realism in their approach”

At the same time, investors are now getting more time to make a decision compared to last year when founders had many choices quickly. “You get more time now. Folks are more focussed on fundamentals and the metrics that matter like revenues and profits and shorter time horizons to that,” he adds.

Unlocking the Bharat opportunity 

The digital infrastructure in India lays ground for many tech innovations to take place. “There is probably no one here in the room who has not had a vaccination using the Cowin platform. This was a de novo digital programme – we're the only country in the world where the only way to get vaccination was to go to a digital system to get it done. And it has worked at a scale in a short amount of time in a way that even we in India did not think was possible,” Sharad says. 

If in the last few years you’ve seen a lot of the middle class population being served very well by the startup ecosystem, he believes the time has come for growth to take place in the Bharat market.

The tech veteran asserts India has reached a point where the Bharat market has opened up in ways that are not fully appreciated. “There is an underserved market where if people get their act together, that would be a very good market to go after,” he adds.  The difference in tapping the market this time around is that for the first time, there is a chance to be off a deleveraging cycle, attracting some of the bigger companies too as active participants and investors.

“Therefore, we'll have to find a dynamic between startups and big companies that we previously didn't have to worry about. But taking all this into account, I personally feel this is the best time to be an entrepreneur in India even as we go through this global correction, "says Sharad.  

Electric Vehicle, Cleantech, and other sectors of promise

Saurabh Chandra, Managing Director, BCG India, believes that it is time to solve-for future-facing problems like greentech and Environmental, Social, Governance (ESG), and Web3. No-code platforms are also surfacing as everybody looks for digitization. 

According to Shailesh, cleantech is likely to become a more mainstream area of investment. The Sequoia India leader expects more activities to take place in sectors like fintech, SaaS, hopefully, Web3. 

How adtech and web 3 spaces would pan out remained a bone of contention. While Sharad believes that anybody focussed on adtech businesses are heading towards trouble and that the crypto community operates as speculators making a mess of things, Shailesh maintains a polar opposite stance. 

Sharad says that in an Adtech market of $400 billion, tech giants like Google, Facebook, and Amazon already have eaten up major portions of the market with Google plans to drive 50 percent growth in revenue in two years. 

“As Google drives up the prices of acquisition, there will be businesses that won’t survive in a tough economic environment – some businesses will eat all the profit or have a viable unit economics but most of them won't. I think if you're focussed on acquisition based on adtech, you're in a soup,”  Sharad says. 

On the other hand, Shailesh maintains, “The digital ad market in India has crossed $8 billion annually. That's a big market and there will definitely be opportunities to build startups. Similarly, in Web3, there will be some bad apples for sure but there will be some wonderful things being done there too.”

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