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Indian unicorns cut jobs, close units to conserve scarce capital

Meltdown in public markets as free-money era ends and thrift takes over

Indian startups will find it harder to raise new capital as investors turn cautious amid the meltdown in public markets. (Source photo by Vedantu YouTube and Getty Images)

BENGALURU -- India's biggest startups are turning thrifty amid a new reality in which capital has become hard to come by.

At online education startup Vedantu, one of 44 companies that surpassed a $1 billion valuation amid a funding frenzy last year, CEO Vamsi Krishna told employees in an email on last Wednesday that "capital will be scarce in the coming quarters."

Vedantu will lay off 424 executives, slash spending on acquiring new users and scrap "non-core" initiatives to preserve enough capital for 30 months. The layoffs came a couple of weeks after another 200 jobs had been axed.

Cars24, which gained a $3.3 billion valuation trading used cars, has cut 600 jobs. Meesho, an e-commerce startup valued at $4.9 billion, has meanwhile asked 150 employees to leave.

At online education startup Unacademy, which soared to a $3.4 billion valuation, 1,000 people have lost their jobs, while 200 have gone from Fulenco, a furniture rental startup. Video commerce startup Trell, which is under scrutiny for financial irregularities, has sacked about 300 employees and healthcare startup MFine about 500.

"The coming days will be more painful for growth-stage companies," said an investor at a growth capital provider who declined to be identified. "A lot of these companies look fragile despite raising a lot of money at very high valuations, and therein lies the problem -- they still look fragile."

Food delivery startup Swiggy, which had a $10.7 billion valuation earlier this year, shut down its subscription service for daily essentials earlier this month in five of the six cities where it operated, despite scaling the business to 200,000 daily orders from about 6,000 in mid-2018. In an email to its employees explaining the unit's closure, Swiggy hinted that big volumes alone are no longer enough.

"While we are now an inalienable part of our consumer's life, we unfortunately are yet to demonstrate a clear path to profitability," Swiggy said. "Today, we find ourselves in a situation where we end up spending a significant amount of time and money in managing the business -- distracting ourselves from our primary goal of establishing the business market fit."

Ola, a ride-hailing company, is also scaling down its food and grocery delivery services.

Together these startups raised about $4 billion since January 2021, with Swiggy accounting for about half of that. All of them are in the red.

Shailendra Singh, managing director at Sequoia Capital India, said in a tweet earlier last week that board meetings are "now focused on efficient growth, sustainable unit economics and pragmatic capital allocation."

"Frugality is back in fashion," he tweeted.

From trimming workforces to shutting down unprofitable business units, the startups are pulling out all stops to save for a rainy day as investors turn cautious amid the global meltdown in public markets.

This is a big change from last year's aggressive expansion, when startups spent heavily on marketing and hired employees at high salaries as they rode a funding boom.

India's top 50 advertisers in 2021 included 15 startups operating in markets that included online education, financial services, fantasy sports and cryptocurrencies. Some managed to outspend household names like Reliance Industries, Procter & Gamble, Google, Mondolez, ITC, Coca-Cola, Pepsi, Nestle and L'Oreal.

Indian startups raised $8 billion across 520 deals in the January-March quarter, down 20% from the $10 billion pumped in the October-December quarter, according to data provider CB Insights.

"Last year, people were fighting to say yes, but this time there are more people finding a reason to say no," said Shivakumar Ramaswami, founder and director at Indigoedge, an investment bank. "Most people are scared to price [a deal] in this market because they don't know where the bottom is."

Zomato, Paytm and Policybazaar, which listed on bourses last year, are all trading below their issue price.   © Reuters

As a result, the bar for investment is much higher this year. "Investors who were valuing startups at revenue multiples last year now want to value them at net earnings multiples," said an investment banker on the condition of anonymity. "It's a function of the broader markets."

Technology stocks in the U.S. such as Peloton, Netflix, Palantir, Rivian, Snowflake, Robinhood, Stich Fix and Open Door have borne the brunt of aggressive selling off, and Nasdaq has tumbled 28% since the start of the year.

Closer to home, India's benchmark stock index has slipped 11% in the same period. Technology stocks such as Zomato, Paytm and Policybazaar that listed on bourses last year are all trading below their issue price. Small investors shunned shares of logistics startup Delhivery that launched its initial public offering earlier this month.

The slowdown is unlikely to ease anytime soon despite a bunch of Indian venture companies such as Accel, Elevation Capital and Blume Ventures raising new funds in the past 12 months. Sequoia Capital has received a commitment from investors for a gargantuan $2.8 billion to be invested across India and Southeast Asia, but delayed closing the fund in the wake of alleged financial irregularity in a portfolio company.

"Understand the poor public market of tech companies significantly impacts VC investing," Silicon Valley incubator Y Combinator said in a note to its portfolio companies, adding the funds will find it harder to raise money -- and if they succeed, investors will expect more "investment discipline."

"As a result, during economic downturns, even top tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die)," the incubator said.

Prayank Swaroop, partner at Accel, says companies have to perform "exceptionally well" to raise capital. "The era of free money is at a pause, till this uncertainty passes over."

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