Startups refund investors in ethical move after shutdown and failed pivot

The shutdown of SaaS startup Toplyne took many by surprise, as the San Francisco and Bengaluru-based company became one of the few from the well-funded segment to halt operations. Having raised over $17 million from investors like Tiger Global and Peak XV, the firm also garnered attention for its commitment to return the remaining capital to investors, highlighting the importance of ethical practices in the startup landscape.

Not just Toplyne, but a bunch of startups that shut down or pivoted have returned capital to their investors after struggling to establish a sustainable revenue model. They also encountered challenges such as funding shortages, adverse market conditions, and cash flow issues.

According to data from TheKredible, as many as 8 Indian startups have refunded investors after either ceasing operations or unsuccessful pivots as of October 12. This accounts for 50% of all shutdowns and pivots that have occurred in the current calendar year.

Paras Chopra-led Nintee was the first to announce its shutdown and return capital to investors in April this year. It was backed by Peak XV and angels like Kunal Shah. Following this, several other startups joined the trend, including edtech firm Bluelearn and trading platform Investmint, as well as offline firm Convenio, launched by former Swiggy senior vice president Karthik Gurumurthy. Most recently, agritech startup Greenikk also announced that it would refund investors after ceasing operations. It’s worth noting that Gurumurthy had raised $3 million from Matrix Partners and others in stealth mode.

Earlier this year, two fashion tech companies—Fashinza and Virgio—opted to return capital to their investors after struggling to find traction with their original business models. Virgio, led by former Myntra CEO Amar Nagaram, raised over $37 million from investors including Prosus Ventures, Alpha Wave Partners, and Accel Partners before its pivot. Fashinza, the highest-funded company on the list, secured $150 million in equity and working capital from notable backers such as Mars Growth Capital, Liquidity Group, Accel, Prosus, WestBridge, and Elevation Capital.

In the current debate about the market savvy of Bengaluru startups compared to those in Delhi NCR, it's interesting to observe that five startups on this exclusive list originate from Bengaluru, whereas only two are from NCR.

Between 2022 and 2023, several startups, including Frontrow, Udayy, ConnectedH, and Anar, had returned capital to their investors after shutting down operations for various reasons.

The return of capital should not be as big a deal as made out, but catches attention simply because of the times we live in. When fund raising is treated as a massive success in itself, returning those (or whatever remains) funds is certainly a call a founder would make after much agonising normally. Or after burning through most of those funds in trying to pivot, than accept failure. While strong founder ethics and a long term view on the reputational impact is one factor, we believe it is also increasingly a function of how closely investors work with them. And yes, while it will never be as acceptable as many would like, failure is a lot less damaging to future prospects for a founder today than even a decade back.

Many investors today, as they work with younger founders especially, keep a very close eye on the day to day running of the business and metrics, giving them a much more deeper understanding of business direction. Thus, where a thesis has failed completely, decisions on shut downs are being taken faster now. Finally, in the rarefied world of fund raising, where access to the right networks matter, as more startups have been funded, we can see longer memory for the performance of the deal sourcing people as well. It would be no surprise if many of these have played an instrumental role in ensuring a return of funds to a VC where they hope to do more work in the future.