Increasing investments, secondary deal value, and layoffs in startups during economic slowdown

The Indian economy is facing a serious downturn with clear indicators of an upcoming recession. The GDP growth has gone down from 8.2% in FY17 to 6.8% in FY19, 5.8% in Q4 FY19, and 5.6% in Q1 FY20. Private consumption, which is one of the main factors that drive this GDP growth, has gone down due to even slower growth in the urban, rural, corporate income and wage numbers, and hence leading to a recessive growth in savings.

All the interlinked factors are creating a worrisome economic circumstance, a hit that would take a significantly long time to recover.

On the other hand, in the startup universe, reports show that despite all these economic developments, the money inflow in these new-age businesses continues to grow year on year. The first six months of 2018 had seen $4.3 billion being invested across 338 deals.

In the corresponding period in 2019 - the first six months - the figure has grown to $4.7 billion, and the number of deals has increased to 346 deals. If we make a reductive and unrefined analysis, this implies $400 million more in 8 extra deals. Where this growth is marginal, and statistically, most likely insignificant, reports claim that it is a symbol of growing investor interest in Indian startups, a healthy behaviour.

The reason that the industry experts believe that this is happening is because of how the economic conditions of the country’s impact is not being reflected in the financial performance of the startups. Stellaris Ventures’ Managing Partner Ritesh Banglani told Mint that the startups are still growing at a rapid pace, an unprecedentedly fast pace, and that is what is driving the continuous investments.

These startups are banking on their tech to cope with the economic downturns in the long run. As of now, these Mint’s entrepreneurs sources claim to be growing well even with the current scenario due to the small scale with enough headroom for growth.

Even the VCs like Blume Ventures, Endiya Partners, India Quotient, and others are in the market to pick up their next funds, worth about $350 million in total. As far as the investor angle is concerned, 2019 has already surpassed 2018 in terms of potential secondary exits. This year, disclosed secondary share deals are expected to be around $1.6495 billion, where last year, the total secondary VC exits were worth $1.129 billion. There is still no ideal around how much the secondary deals at BigBasket, UrbanClap, BookMyShow, BYJU’s, Lifelong Online, Delhivery, and Unacademy will be worth, and if these have been executed yet or not.

However, the 2019 figure still does not reflect YoY growth in secondary exits as $1.5065 billion out of the total quoted figure is just OYO’s secondary transactions. Ritesh Agarwal is buying Lightspeed, Sequoia, and Greenoaks stakes for about $1.5 billion altogether, and DSG Partners exit OYO in March with a minimum of $6.5 million.

The remaining $143.01 million was limited to exits facilitated by funding rounds in Instamojo, Dream11, Billdesk, Spinny, and TagBox. A rather small number compared to 2018.

Where we look at this marginal growth in startup investments and improving performances, there are still several angles to look at before using startup related numbers to contest the economic conditions.

Numerous startups like Zomato, Cars24, Rivigo, Rubique, Ola, Jabong, ShopClues, Treebo, UrbanLadder, Jio, Cleartrip, ZipGo executed layoffs, and some of them downright counted the economic slowdown as the reason behind the same. The rest had to do the same because of the funding crunch, growing expenses, and decreasing demand and supply.

Ola and Uber, even when operating in a country as populated as India claim to be facing a problem of market saturation in tier 1 and a lack of people willing to pay the desired prices in the lower tiers. Henceforth, bringing a slowdown in their growth rates.

Even if these startups get any amount of funding, they cannot solve the problem of slowing growth in income and savings. And their growth is directly related to the disposable income and savings available with the customers, operating in the consumer internet segment as they do.

In fact, the problem of liquidity crunch is already hitting fintech startups that used to be the greatest hotbed for investments in the recent past and remains to be.

Economic figures were taken from Business Today report.