Feb 7, 2023

Startups to cut costs further as funding winter may last a year SECTIONS By Rate Story Synopsis In January, Indian startups raised only $1.38 billion in venture funding, nearly 70% lower than in the same period of 2022, reflecting the slow pace of fundraising, data from Tracxn, a platform for privately held startups, showed. ETtech The next 10-12 months will be uncertain for startups as companies - large and small - look to prune costs further, multiple investors and founders said, as the industry goes through a significant drop in funding. In January, Indian startups raised only $1.38 billion in venture funding, nearly 70% lower than in the same period of 2022, reflecting the slow pace of fundraising, data from Tracxn , a platform for privately held startups, showed. This underscores the wider sentiment among founders, chief executives and investors. They told ET that even after undertaking layoffs, additional cost-cutting measures will have to be implemented to wade through the tough period. New York-based investment fund Tiger Global’s partner Alex Cook told at least two startup founders in Bengaluru last week that new deals will have to be reordered from all perspectives including pricing of investments. Tiger Global has been among the most aggressive investors in Indian startups for over the past 15 years, and a word of caution from its senior executives is significant. Funding squeeze palpable across stages Discover the stories of your interest Several startups backed by both Japan’s SoftBank and Tiger Global as well as others in India have had to fire a chunk of their employees and are cutting operating costs. For example, Tiger Global-backed ShareChat conducted one of the largest layoffs by a startup recently when it fired over 500 last month, while another portfolio firm Unacademy told staffers there will not be any cash appraisals this year and only performance-based stock options would be given. Unacademy cofounder Gaurav Munjal told ET that there was no certainty on when a revival would take place; the focus is on sustainable growth and profitability. “We have cash but there is a lot of unpredictability right now and nobody knows how the markets will behave. We have shifted to Default Alive mode. Our focus is profitable growth and sustainable growth,” he said, explaining the rationale of how he is approaching the rest of 2023. “Tiger will continue to make new transactions, but they will have to be at new ‘rational prices’ whenever a potential investment is in the works,” a source said. “Of course, their global bets are not doing good at all. So, they need to take stock of existing and new bets globally and in India.” ETtech At a recent event, Tiger Global’s head for private investments Scott Shleifer said India will be the best place to invest even though returns have been disappointing, historically. An email sent to Tiger Global didn't elicit a response till press time Monday. Curtailing moonshots, focus on core business metrics Well-funded unicorns like SoftBank-backed ElasticRun are also taking cost cuts, including reducing focus on the feet-on-street teams for delivery of goods, people aware of the matter said. This is largely due to the company prioritising the important and non-negotiable parts of its core business to grow sustainably. “They (ElasticRun) raised enough money last year before the downturn began but they are cutting on what can be cut. The de-prioritisation of local delivery network will also increase margins as you don’t have to pay a cut for the deliveries. In times like these, one has to take these measures to strengthen the business,” a person aware of the Pune-based firm’s thinking said. Sandeep Deshmukh, cofounder and chief executive of ElasticRun – who previously worked at Amazon – declined to comment. “As founders, we have to take a call as to whether we become a more prudent company in the long run or just until the next funding boom. If we decide to become prudent inherently, then we'll have to resist the temptation to accelerate growth even when the funding tap opens up,” the founder of a Gurugram-based unicorn, who has undertaken job cuts at his firm along with pausing overseas expansion plans, said. ETtech “We had already started scaling down internally in late 2021, when everyone was going ballistic. The teams were asking us why we were doing this. I had a sit down with my co-founder and we concluded that we were going faster than we’re enjoying. We curtailed a lot of initiatives,” the founder said on condition of anonymity. What’s next? A founder of an ecommerce unicorn said the brief is clear to the team, “We are working to show there is a path to profitability under the current model and if it needs changes we are taking it. Experiments will be scaled only when there is economic sense. Otherwise, we are not scaling them and burning more money in those projects,” this Bengaluru-based entrepreneur said after laying off employees and withdrawing from smaller cities and towns. “We’re telling founders that one thing is clear — even if funding starts again, it may not go into every business.... We’ve been advising them to go back to the drawing board and to study the need to pivot. It’s not just about saving money now,” said Anand Lunia, founding Partner at India Quotient–an early investor in ShareChat as well. According to him, redrawing business plans and asking if a company has the right business model is very critical. “I think founders have to shift away from this empire building mindset, whether in terms of team, number of customers, number of outlets, etc. They have to say that we need to become wealth creators. In any case, it is unlikely that in the next 2-3 years another funding boom will come, but even if it does, it will not reward empire builders,” he said. A senior consumer internet industry executive said many of these startups are resorting to layoffs but that’s only a quick fix in the short-term. “In the peak of funding in 2021, companies without any business model or revenue raised a lot of capital and raised valuation thrice in a year. Now, they have to find a proper path of how to find and grow revenue and that too in a sustainable manner and not by burning cash,” this person said. “Multiple ecommerce platforms–consumer or B2B – are seeing a drop in overall gross merchandise value, or GMV. The range can differ but it is at least 30-40% in most cases,” an B2B ecommerce founder aware of industry numbers told ET. More layoffs? While over 18,000 staffers across various startups were fired last year and at least a few thousand job cuts have happened in January, there is no certainty if the job cuts are done with. Founders told ET that layoffs have had a definite impact on employee morale and have created uncertainty in their minds. “Leadership salary cut happened about six months back. We cut about 20% and yet no senior leader has left since then,” Munjal of Unacademy said. Hiring agencies and consulting firms have indicated that layoffs may continue till at least the end of the ongoing quarter. “It is really a difficult choice to lay off employees – whether one believes it or not. Everyone went overboard while chasing pandemic-induced tailwinds and now a new reality has set in and companies don’t have a choice but to adjust the organisation,” a startup founder who recently laid off employees said. Layoffs alone may not be enough for management teams of startups to tell investors that they have become more prudent, said Lunia of VC fund India Quotient. “Do we have the right business goals — that needs a lot of conviction. It is difficult. People have cut down costs, but more efficiency is needed. Only thing achieved now is 20% layoffs (of teams), which may not be enough to discover a market, grow and raise again,” Lunia said. Illustration and graphics by Rahul Awasthi Don’t miss out on ET Prime stories! 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