The Indian start-up ecosystem, which underwent an exhilarating phase in 2021 when private equity and venture capital investors had pumped copious amounts of money into these fledgling ventures, is not out of the woods yet. But there could be some rewards for start-ups that are willing to learn from their mistakes by targeting more sustainable growth.
The so-called funding winter continues with cost of finance increasing (as central banks tighten aggressively) and the large losses registered on their technology stock portfolio reducing investible surplus of these investors. Investments of PE-VC investors was less than $12 billion in Indian start-up companies between April and June 2023. This is 15 per cent lower than the value of investments in the same quarter in 2022 and around 50 per cent down compared with the September quarter of 2021, when these investments had touched a record high.
But here’s the positive news. A recent report in this newspaper revealed that foreign portfolio investors’ shareholding in listed start-ups such as Zomato, Paytm and PolicyBazar had tripled in the June 2023 quarter when compared with corresponding quarter in 2022. FPIs appear to be on the right track because these companies have recorded strong growth in revenue, ranging between 37 and 64 per cent, and have pruned their operating losses considerably in the first quarter of FY24. Operating loss of Zomato narrowed from ₹307 crore in the first quarter of FY23 to ₹48 crore in the first quarter of FY24. Paytm has reduced its operating loss from ₹234 crore to ₹77 crore in the same period. While the focus earlier was on showing higher growth to attract steep valuations, investors are now demanding much more than mere business growth. Many of these companies have reduced their workforce, closed loss-making verticals or subsidiaries and cut down selling expenses considerably in the past year to reduce losses. Zepto, which was the first start-up to join the unicorn club in 2023, also announced that it is concentrating on turning EBITDA positive in the next 12-15 months, reiterating the changing mindset among start-up promoters.
The increasing FPI interest in some of the start-ups indicates that companies which can show better financial metrics and stable growth may not find it difficult to raise funds. But other companies too need to learn from their mistakes. Market size estimations based on over-optimistic projections of user base, need to be readjusted. More important, governance needs to improve with timely compliance with all regulatory requirements and disclosures. Recent instances of misgovernance in some of the larger start-ups would have dealt a setback to the fund-raising plans of the entire sector. Besides SEBI regulating the listed start-up companies, the Ministry of Corporate Affairs too needs to improve its supervision of the unlisted start-ups. Only then can these companies regain the trust of investors.
