Bad finances, job loss: The Great Indian startup dream is coming crashing down

Though the Indian startup dream took off in 2021, it seems to be crashing down in 2022. Changing trends have also changed the cost of business, legal compliances are cropping up, companies are unable to shift business models and some have even spent money recklessly.

2021 was an abnormal year that witnessed a never before seen trend - new startups and IPOs launching out in multiple sectors. Indian startups raised about $42 billion in funding in 2021, and India saw about 46 unicorns in one year as global investors lined up to throw money into India. As of June 2021, India saw 50,000 new, recognized startups since 2016 employing around 6 lakh people. In 2021-22, 16,000 new startups were added. Of these, over 100 companies turned into unicorns (ie have been valued at $1 billion) ie Rs 7,760 crore.

But in 2022, it seems like the tides have suddenly turned and the winter is here. 2022 is witnessing a surge in startup problems - unexpected mass layoffs, funding wells drying up as investors are exiting, piling losses, a change in trends and so on.  As per India Today, about 5,800 startups have been axed since 2022. 

You may have seen news reports when Unacademy, Cars24, and Ola together laid off 2,400 employees together (600,600 and 1,200 respectively). Companies like Meesho, Furlenco, and Vedantu too have been in news for the same reasons. In fact, as per Inc 42, about 11,363 employees have been sacked from 34 startup companies in 2022, with edtech companies laying off the most number of employees.

It looks like the startup dream is crashing: The shares of listed companies are crashing on the stock market, and banks are levying higher interest rates making funding costlier. Banks are also tightening monetary policies as global inflation rates rise, and when you couple that with uncertain business environments and a rising rupee-dollar exchange rate, foreign investors would rather not invest money to preserve the value of their money.  

So what kind of problems have Indian startups faced? It looks like there are certain types of problems that are causing startups to fail:

1. No sustainable need in long term, change in trends & respective business costs: When it comes to online industries like retail, food, and education, 2022 has witnessed a ''physically active'' trend than 2020 and 21 as economies have reopened. Schools have opened up, work from the office is back and people are primed to go out shopping and dining when possible.

Edtech startup Udayy, which solely had an online presence decided to shut down its business despite having a large capital. This is because they were incurring large customer acquisition costs in 2022 as compared to 2020 and 2021. Why? Because people and businesses were now preferring offline sales and simply having an online model does not guarantee long-term growth. Ed-tech firm Vedantu laid off 624 employees citing a ''tough external environment'' and because it was looking to reduce its customer acquisition cost.   

2. Wrong product-market fit: A product-market fit means a business's products satisfy a particular type of market enough to keep it in business for a long time. 

For eg: You might remember ads by 'Dinnr' that showed up in newspapers and TV screens. Dinnr allowed customers to select a recipe and order pre-measured ingredients with instructions. But the company failed since no one really needed select ingredients for one recipe since they could get it themselves from the market. Customers would rather eat out or make meals at home. 

Protonn was another startup that helped independent professionals to launch their businesses. But despite raising $9M in seed funding, it shut down in January 2022 because it was unable to find a product-market fit. The founders were unable to rework the company’s business model in order to adapt. 

Services that are offered by Dunzo could also fall under this category. Dunzo delivers groceries for a price, something which your local grocery store, laundry wala guy, and medical chemist do for free through a Chotu. Why would you as a customer use Dunzo then? 

3. Not using resources well: Mumbai-based food delivery app TinyOwl was doing wonderfully until it closed down because they realised that they had spent a lot of money on over-hiring about 1,000 people. They did not have good management structures in place, especially for the top management. After they had spent a lot, they decided to lay off people, which obviously did not go down well. Also, since the founders did not have industry experience and did not know what metrics to work on, the Owl ended up running around like a headless chicken. 

Why #UX matters in the super hot food delivery space ft. @Zomato, @TinyOwl_App, @swiggy_in - https://t.co/8JlYuMygIN pic.twitter.com/IzjuUhsVb6

— Karen Mok (she/her) (@themokstories) October 18, 2015

4.  Unnecessary marketing spend/cash spend: When credit platform Cred spent its budget making ads, it started a debate about the value of startups without a good business model. In fact, a post-ad survey showed that customers did not know even understand what's Cred business was. Similarly, Local Banya first achieved a fund of $5 million (Rs 39 crore) and then offered great deals and bargain prices which reduced their cash balances. 

Local banya smart grocery plans. Interesting. pic.twitter.com/e6cnMPgbQw

— Ashish K. Mishra (@akm1410) August 28, 2015

4. Legal complications: Though there aren't many Indian startups that have closed because of legal complications, Indian startup Koinex facilitated the real-time trading of cryptocurrencies in 2017. But, in 2018, when RBI mandated all government exchanges and banks to stop working with organizations that dealt in crypto, Koinex filed a case against RBI. But eventually, it closed down. Binance.com too closed down its cryptocurrency exchange in Singapore in February 2022, after the Monetary Authority of Singapore forced Binance.com to stop providing services to Singapore residents.

5. Financial irregularities & piled-up losses: A lot of startups fail because they either run out of cash, run businesses by suffering losses, or have some kind of financial irregularities. As per Entracker, out of India’s 100 unicorns, only 18 attained profitability in 2020-21, while 57 are deep in losses. 

Companies like Paytm, Oyo, Flipkart, Phonepe, Unacademy, Swiggy, Ola are all loss-making companies. They are yet to make profits any time soon but are using investors' money to stay alive since their business models aren't as popular with customers today, as it once was. 

You might also remember fashion tech startup Zilingo, whose owner Ankiti Bose was ousted from her own company after an independent forensic audit found her creating financial irregularities in the company. Though the company was backed by prominent investors and valued at $970 million (Rs 7,529 crore) in 2019, all it took was some financial messing around to fall down. 

Recently, Minister Karti Chidambaram wrote a letter to SFIO to investigate the finances of edtech firm Byjus since Byjus had not filed its financials because it had not yet received the financing from its investors.

I have written to the #SFIO to look into the financing of @BYJUS it’s imperative that a thorough investigation is launched. @MCA21India @sequoia pic.twitter.com/DfBUNhNxNU

— Karti P Chidambaram (@KartiPC) July 21, 2022

What do you think of the startup trend of 2022?