Market reality is catching up to the tech startup ecosystem

News: In recent years, India has been witnessing the growth of the start-up ecosystem which has been in overdrive for the past few years.

What are the factors that have led to growth in the start-ups in India?

On the supply side, the start-ups were able to find cheap money, and they also benefitted from negative real interest rates.

On the demand side, the start-ups were supported by the strength of the Indian consumer, and the economy. India has been witnessing an accelerated financial inclusion (bank accounts) and identification became easy in India through Aadhaar. Connectivity also increased through mobile phones.

What are the challenges?

In recent times, the start-ups that have gone public, are facing losses. For example, Paytm’s, Zomato and PB Fintech (Policy Bazaar) have registered losses.

The era of cheap money is now showing signs of weakness in India. The investors from early-stage venture capitalists to institutional and retail investors, are likely to be more cautious in their dealings. For example, Alibaba and Ant Financial exited their entire holdings in Paytm Mall. The start-ups ranging from Ola to OYO, are planning to raise funds at lower valuations.

Due to high no. of the smartphone users in India, the transactions routed through the UPI platform was high, and there is near universality of bank accounts. But in reality, there are not many consumers with significant discretionary spending capacity, and those with the capacity aren’t increasing their spending as these companies would hope. For example, in 2021-22, Zomato received around 11 orders per customer for the entire year or less than one order per customer per month.

Another worrying factor is the complete absence of any increase in spending by the consumers who are already on these platforms. For example, Zomato, in 2020-21 registered an average order value of Rs 397 and in 2021-22 the average order value was Rs 398.

What should be done?

There is a need for tighter financial conditions, and a re-rating of the market, both of which will impact both fundraising efforts and valuations.

There is a requirement to answer questions like to what extent will investors continue to subsidise consumers? Will startups still command the same valuations they have received in previous fundraising rounds? Or will we see down rounds?

Source: The post is based on an article “Market reality is catching up to the tech startup ecosystem” published in the Indian Express on 28^th June 2022.