TNN CHENNAI: Resilience. Survival. Strategy. Profitability. The startup vocabulary of 2016 has been markedly different from the glory years of 2014 and 2015 when unicorns were born every other week, and sky-high valuations meant scale and size won over strategy and solid business models.
This year as funds dried up, a number of promising startups of 2015 shuttered while others laid off employees. Food tech, hyperlocal services and e-commerce, which were the heroes of 2015, found the going tough. Meanwhile fintech, SaaS, B2B, and AI startups seemed to pull ahead. Startups returned to the basics, taking a hard look at profitability and resilient business models. Investors too urged founders to weigh costs and returns rather than just throw money wildly into customer acquisition and scale.
Flipkart, Snapdeal, and Ola, the poster children of the Indian startup scene, watched their valuation dropping — Flipkart, most notably, from over $15 billion to $5 billion. Several well-funded startups such as PepperTap (on-demand grocery), AskMe (classifieds), SaaS,68and Dazo (both food delivery) shut shop or merged with other players as raising capital became tough.
Global giants Amazon and Uber with their deep pockets and tested business models pushed domestic startups to the wall. Flipkart's Sachin Bansal and Ola's Bhavish Aggarwal said their foreign rivals were "dumping capital" to win market share and sought policies for a level playing field. Uber's Travis Kalanik chose to retort with humour: "If it is just a matter of whether the founder is an Indian citizen, then I will apply for citizenship."
2016 underscored the fact that entrepreneurship is about more than just valuation. "This has not been a year of funding. We got funded this year only because we were creating value and assets instead of going after valuation and hyper-growth. This was not attractive to investors in 2015. When you are in a hockey-stick growth without looking at the bottomline, you might attract valuation," said Ajith Mohan Karimpana, founder and CEO of online furniture rental startup Furlenco.
Fewer investments made
Data from various sources reflect the year's struggles. The number of investments in startups fell to 181 deals in the last quarter of 2016 from 346 a year earlier, according to data from VC Circle. Similarly, funds deployed slid to $411 million from $648 million in the same period. Startup tracker Tracxn also provides similar data — investments in 2016 ($3.89 billion) were just about half of 2015 ($7.54 billion).
"Investors seem to be sitting on the sidelines, being selective in making investments, and focusing more on realising investments. Given the fact that both the number and value of deals continue to slip across the early-stage spectrum, the trend clearly suggests that investors have started writing smaller cheques. Raising capital was not at all easy this year," said Vijay Prakash Rai of VC Circle.
Investors agree that valuations were driven artificially in previous years. "People got lured into thinking that they could build companies and ramp up quickly like China. One can't keep discounting and spending on customer acquisition. Valuation mark downs are a reflection of this and it is a hard lesson," said Karthik Reddy, managing partner, Blume Ventures, one of the most active seed-stage investors this year.
New fund sources
As VCs stepped carefully, startups like TermSheet (which facilitate deal-making) and Kleeto (smart document storage system) took to crowdfunding platforms to seek funds. Venture debt was another route for growth-stage startups. Jewellery e-tailer BlueStone, tech-enabled hotel chain Treebo, raw material supplier Power2SME and online tea brand Teabox were among the many that took to venture debt.
"Equity is more expensive than paying interest and we were getting debt at an attractive rate. We did not want to dilute equity in a tough market and wanted to have sufficient cash in case the situation got worse. Now we have cash for three years," said Kaushal Dugar, founder of Teabox. The startup raised an undisclosed amount in venture debt from DBS Bank earlier this year, and has raised $9 million in funding from Accel Partners, Jafco Asia, and Horizen Ventures.
Online furniture rental startup Furlenco raised $30 million in debt and equity this year. "Debt fund keeps you from diluting too fast too soon. For us, debt is the main route to fund assets. The day we become profitable, we won't need equity funding at all. More equity with the founders means more leverage as well," said Karimpana of Furlenco.
Staying the course
Through the tempest, a few sectors stood strong. Powered by demonetisation, fintech players such as Paytm, MobiKwik, Freecharge, and Ezetap have been growing. And with this, came a natural increase in investor calls as well.
"November was just the beginning," said Abhijit Bose, founder, Ezetap, which produces smartphone-based payment devices. "Fintech, even before November 7, was a phenomenally hot market. Most fintech companies were growing year on year. The shift in India was organic. The innovation and speed of adoption were unprecedented. And that was all before November," he said. The Bengaluru-based company, which currently processes Rs 1,000 crore a month compared to Rs 200 crore last November, has seen 500% increase in growth from last year.
Another sector that's stayed the course is B2B (business to business) and SaaS (software as a service). Chennai-based Freshdesk raised $55 million in a Series F round from Sequoia Capital and existing investors . Artificial intelligence (AI) startup Mad Street Den, web optimisation software startup Zarget, salon and spa software company Zenoti all raked up funds this year.
"The challenge with B2B is that they don't look sexy enough to become billion-dollar games, so funds are slower to go their way," Mohan Kumar of Norwest Venture Partners said: "B2B enterprise startups have been around for at least five years. Since sectors like consumer internet, which were heavily funded earlier, saw a smaller cash funnel, B2B companies got interest."
Lessons have been learnt, and the last 18 months have been about rationalisation. The focus has moved to solid ideas, passionate founders, shrinking cash burn and building profitability.
(With inputs from Shalina Pillai and Anand J)
This year as funds dried up, a number of promising startups of 2015 shuttered while others laid off employees. Food tech, hyperlocal services and e-commerce, which were the heroes of 2015, found the going tough. Meanwhile fintech, SaaS, B2B, and AI startups seemed to pull ahead. Startups returned to the basics, taking a hard look at profitability and resilient business models. Investors too urged founders to weigh costs and returns rather than just throw money wildly into customer acquisition and scale.
Flipkart, Snapdeal, and Ola, the poster children of the Indian startup scene, watched their valuation dropping — Flipkart, most notably, from over $15 billion to $5 billion. Several well-funded startups such as PepperTap (on-demand grocery), AskMe (classifieds), SaaS,68and Dazo (both food delivery) shut shop or merged with other players as raising capital became tough.
Global giants Amazon and Uber with their deep pockets and tested business models pushed domestic startups to the wall. Flipkart's Sachin Bansal and Ola's Bhavish Aggarwal said their foreign rivals were "dumping capital" to win market share and sought policies for a level playing field. Uber's Travis Kalanik chose to retort with humour: "If it is just a matter of whether the founder is an Indian citizen, then I will apply for citizenship."
2016 underscored the fact that entrepreneurship is about more than just valuation. "This has not been a year of funding. We got funded this year only because we were creating value and assets instead of going after valuation and hyper-growth. This was not attractive to investors in 2015. When you are in a hockey-stick growth without looking at the bottomline, you might attract valuation," said Ajith Mohan Karimpana, founder and CEO of online furniture rental startup Furlenco.
Fewer investments made
Data from various sources reflect the year's struggles. The number of investments in startups fell to 181 deals in the last quarter of 2016 from 346 a year earlier, according to data from VC Circle. Similarly, funds deployed slid to $411 million from $648 million in the same period. Startup tracker Tracxn also provides similar data — investments in 2016 ($3.89 billion) were just about half of 2015 ($7.54 billion).
"Investors seem to be sitting on the sidelines, being selective in making investments, and focusing more on realising investments. Given the fact that both the number and value of deals continue to slip across the early-stage spectrum, the trend clearly suggests that investors have started writing smaller cheques. Raising capital was not at all easy this year," said Vijay Prakash Rai of VC Circle.
Investors agree that valuations were driven artificially in previous years. "People got lured into thinking that they could build companies and ramp up quickly like China. One can't keep discounting and spending on customer acquisition. Valuation mark downs are a reflection of this and it is a hard lesson," said Karthik Reddy, managing partner, Blume Ventures, one of the most active seed-stage investors this year.
New fund sources
As VCs stepped carefully, startups like TermSheet (which facilitate deal-making) and Kleeto (smart document storage system) took to crowdfunding platforms to seek funds. Venture debt was another route for growth-stage startups. Jewellery e-tailer BlueStone, tech-enabled hotel chain Treebo, raw material supplier Power2SME and online tea brand Teabox were among the many that took to venture debt.
"Equity is more expensive than paying interest and we were getting debt at an attractive rate. We did not want to dilute equity in a tough market and wanted to have sufficient cash in case the situation got worse. Now we have cash for three years," said Kaushal Dugar, founder of Teabox. The startup raised an undisclosed amount in venture debt from DBS Bank earlier this year, and has raised $9 million in funding from Accel Partners, Jafco Asia, and Horizen Ventures.
Online furniture rental startup Furlenco raised $30 million in debt and equity this year. "Debt fund keeps you from diluting too fast too soon. For us, debt is the main route to fund assets. The day we become profitable, we won't need equity funding at all. More equity with the founders means more leverage as well," said Karimpana of Furlenco.
Staying the course
Through the tempest, a few sectors stood strong. Powered by demonetisation, fintech players such as Paytm, MobiKwik, Freecharge, and Ezetap have been growing. And with this, came a natural increase in investor calls as well.
"November was just the beginning," said Abhijit Bose, founder, Ezetap, which produces smartphone-based payment devices. "Fintech, even before November 7, was a phenomenally hot market. Most fintech companies were growing year on year. The shift in India was organic. The innovation and speed of adoption were unprecedented. And that was all before November," he said. The Bengaluru-based company, which currently processes Rs 1,000 crore a month compared to Rs 200 crore last November, has seen 500% increase in growth from last year.
Another sector that's stayed the course is B2B (business to business) and SaaS (software as a service). Chennai-based Freshdesk raised $55 million in a Series F round from Sequoia Capital and existing investors . Artificial intelligence (AI) startup Mad Street Den, web optimisation software startup Zarget, salon and spa software company Zenoti all raked up funds this year.
"The challenge with B2B is that they don't look sexy enough to become billion-dollar games, so funds are slower to go their way," Mohan Kumar of Norwest Venture Partners said: "B2B enterprise startups have been around for at least five years. Since sectors like consumer internet, which were heavily funded earlier, saw a smaller cash funnel, B2B companies got interest."
Lessons have been learnt, and the last 18 months have been about rationalisation. The focus has moved to solid ideas, passionate founders, shrinking cash burn and building profitability.
(With inputs from Shalina Pillai and Anand J)
