Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Analysis-Zombie unicorns: Indian startups go from feast to famine

Stock Markets May 18, 2022 10:06AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Design artists work on their computer terminals at the Start-up Village in Kinfra High Tech Park in the southern Indian city of Kochi October 13, 2012. REUTERS/Sivaram V/Files

By M. Sriram

MUMBAI (Reuters) -The valuation of Meesho, the Indian e-commerce rival of retail giant Amazon (NASDAQ:AMZN), more than doubled last year to $5 billion, after marquee investors such as SoftBank and Fidelity pumped in hundreds of millions of dollars.

They aimed to ride a boom in India's tech startups, which raised a record $35 billion in new funds in 2021, but the tide has since turned, as corporate governance concerns loom large for investors facing a new uncertainty in global markets.

"We haven't seen a slowdown like this in at least five to six years. It is going to be brutal," said Anand Lunia of venture capital firm India Quotient (NASDAQ:QTNT), an investor in more than 70 startups since 2012.

"I expect to see a lot of zombie unicorns. Companies which became unicorns but have no business models have stopped hiring - they are not dying, but will become irrelevant."

Now Meesho is trying to raise debt and cut expenses after efforts to raise fresh funds of $1 billion floundered, making investors wary of its monthly cash burn of $45 million and stiff competition, two people familiar with the talks told Reuters.

After the Reuters story was published, Meesho in a statement said the information on its "fund-raise and cash burn is factually incorrect and speculative," without elaborating. It added that "raising a new round is about finding the right partners, at the right terms and at the right valuation."

Meesho's struggles are among the first signs of a painful future awaiting many Indian startups.

Plummeting Indian tech stocks are a worry, but investors spooked by fears over corporate governance are stepping up scrutiny during due diligence efforts, which delays funding rounds, two venture capital executives said.

And there are concerns that valuations in India are already too high, even when startups' business models are being led by discounts and there is a bleak outlook for revenue, they added.

That could slam the brakes on the unprecedented growth and dull the lure of Indian startups.

Eight venture capital and startup executives said fears were growing that a funding crunch would lower valuations, leaving less cash to achieve growth and bring job cuts.

Lunia said he had told companies in which his firm has invested to ensure they hold liquid cash sufficient for at least 18 months, reduce spending and headcount, if necessary.

Just last week, BharatPe, an Indian payments startup backed by Sequoia Capital, said it would overhaul governance practices following an internal review.

Another startup Vedantu, which offers online tutoring courses and is backed by Tiger Global with a valuation of $1 billion, laid off 200 staff this month in a "load rebalancing" move it said was based on growth expectations.

On Wednesday, Vedantu said another 424 people will leave the startup, citing a tough external market environment which means "capital will be scarce for upcoming quarters."

Typically, Tiger has targeted bigger Indian startups, but it has now told bankers it will only consider deals involving those with a valuation of less than $200 million, in a bid to reduce risk, said two executives with direct knowledge of the matter.

Tiger did not respond to queries from Reuters.

"PREPARE FOR THE WORST"

With more than 60,000 startups in India, Prime Minister Narendra Modi has labelled the current decade a "techade", in which he added, "New unicorns are coming up every few weeks."

However, April was the first month in more than a year that India had no new "unicorns", a term for startups with valuations above $1 billion.

Indian startups raised $5.8 billion in March and April, down about 15% from the corresponding period last year, data from Venture Intelligence shows.

At a recent private dinner in the southern tech city of Bengaluru, executives of U.S.-based Insight Partners, which manages more than $90 billion in assets, told Indian founders it would target more early stage companies and invest less because of the global tech rout, said one of those who attended.

Insight did not respond to a request for comment.

Many tech companies globally have suffered in recent weeks as the Ukraine conflict and rising interest rates hit investor sentiment.

Japan's SoftBank, which is India's biggest tech investor, with more than $14 billion in investments, has reported a record loss of $26.2 billion at its Vision Fund investment arm.

November brought India's first disappointment with a tech IPO when SoftBank-backed payments app Paytm crashed 27% at its debut, triggering criticism it had overvalued the company without prioritising profitability.

Paytm has plummeted a further 62% since. And while Indian food delivery firm Zomato and beauty retailer Nykaa had blockbuster listings, their shares are down 67% and 43% from their peaks, respectively.

Three Indian startup founders said their investors recently told them the days of easy money were over and they must now show a clear path to profitability.

The message, one of the founders says, is clear: "Prepare for the worst, hope for the best."

Analysis-Zombie unicorns: Indian startups go from feast to famine
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
haitharu Ss
haitharu Ss May 18, 2022 11:44AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
this happens so often it's sad. it's like markets have no memory and repeat mistakes every decade or so
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email