Indian startups yet to be hit by economic slowdown, but stare at tough future

Despite India's growth rate decelerating consecutively for two quarters, the scenario might not be so bad for startups in the country. The sector's dependency on foreign fund flow is being cited as a prime reason for its immunity from domestic economic shocks. Another reason is venture capital (VC) investors, who pump in money to Indian startups taking a long-term view of the market while investing.

“While the Indian economy shows a slight drop in growth rate in important sectors, it is still attracting long-term investors. The entrepreneurs and startups are also dedicated and doing a good job. They are dependent on technology to survive even if economic conditions do not favour them,” said Harshini Kumaravelu, program manager of Gincelerator, a 12-week programme conducted by GINSERV, a Bengaluru-based technology business incubator-cum-accelerator supported by the central government's Department of Science and Technology (DST).

“The slowdown may not impact the capital-raising ability of startups as they do not need heavy capital. Their fund raise will depend on various other factors such as the nature of the businesses, competitive scenario and risk factors. The downturn has no major effect on the performance of the companies yet, and this is exactly what is driving a lot of interest in funding because startups are still blooming,” Kumaravelu told THE WEEK.

While there is no dearth of investments, VCs have become a bit choosy now and are not ready to splurge on ordinary ideas. “As recent rounds of funding to existing startups suggest, there is no dearth of funding (for those) who have robust business models. Kolkata-based Wow Momo is a prime example. In sectors where there are clear and established leaders, VCs remain skeptical of investing in challengers,” said Alok Shende of Mumbai-based Ascentius Consulting.

However, despite investors thinking twice before parking their money, they are still keen on pumping money into those startups with a good team, delivering impressive bottom line growth. “The days of funding aggressive top line growth, albeit at a burn, are over. If a startup wants funding, they should have a credible solution for which customers are willing to pay (which in turn) will cover their costs plus (brings in) a decent margin. The startups have to show that their customers are growing healthily month-on-month,” remarked Suryanarayanan A., program adviser of Gincelerator.

Brand expert Harish Bijoor echoes a similar view. "A slowdown in the overall economy is a time for a greater degree of scrutiny on ideas that seek moneys. Apart from it, it is going to be business as usual. Good ideas will always find good money," he observed.

Any changes in the overseas market, however, will have a more immediate impact on the flow of money to startup sector in India. Another factor is the direction of the public markets. In 2016, the public market was booming even when the private market was on a low. However, there is certainly some minor impacts on the private market.

However, when it comes to fundraising, there are other factors, too, such as volume of funds required and life stage of a startup. “Any investment done in early stage startups will be done keeping in mind the growth in the coming future, and hence, there will not be a considerable impact (on inflow of funds). However, any investment done in later-stage startups will be for a shorter period, resulting in a shying away of funds. Generally, service-providing startups sneak their way out from such macro-economic disturbances and turn out to be an alternative for investors against the mainstream market,” Rajiv Ranjan, founder of PaisaDukan, a peer-to-peer lending marketplace, told THE WEEK.

Hence, startups in pre-early, early or growth stages have less to worry, compared to those in the scaling-up stage, who are already feeling the pinch. “Investors are being extremely cautious (in the current scenario). Seed investors are holding on to their money,” said P.K.B. Menon, managing director of GINSERV.

While the scene is not so bad for the startups yet, experts warn that the current growth rates might impact the sector in the long run. India's GDP growth rate has dipped to 4.5 per cent, the lowest in more than six years. Sectors such as automobile, real estate, financial services and manufacturing have seen their growth falling at an alarming rate.

Menon warns that with rising unemployment, coupled with increased accessibility and affordability of the internet, more and more people are taking up entrepreneurship, without knowing the challenges involved. Jumping wagons without getting proper guidance increases the percentage of failures, he said. “The failure rate is high among the non-incubated startups. Incubation and accelerator programmes are the only ways to increase the success rate among startups in India as they provide the firms with a holistic picture of what goes into making a successful business and shortens their struggling phase.”