Funds dried up and valuations fell: The year that was for startups

The biggest change for technology startups came on November 8, when the government announced its decision to ban currency notes of Rs 500 and 1,000.

Suddenly technology became a large driver for commerce. While retail sales in pockets dropped up to 50%, sales for e-tailers fell 20%. It was also a year of large cultural shifts – more number of buyers shopped online than ever before, and demonetisation added to the drive.

Vijay Shekhar Sharma, founder and CEO of Paytm, said the “era of discounts” is behind us. Discounts are 50% to 60% lower than what it was in 2015.

For food and grocery companies in the e-commerce space, however, business grew 30% to 40%, especially since November, as more and more people preferred to hold cash.

But 2016 has also been the year of clean-ups. In January, Grofers, the second-largest online grocer, closed operations in nine cities. The company wanted to grow through expansion. But funds became scarce, investors wanted a more sound business case, and the market didn’t respond favourably to the company’s growth plans.

“We were facing management issues in some of the cities… We knew it was our last chance to survive,” Albinder Dhindsa, co-founder and CEO of Grofers, had told HT in an interview earlier.

The crunch came after two years of heavy funding. Before 2016, startups were the darling of investors. They were born almost every week, everybody wanted to launch a startup, and those who had money wanted to invest in one or the other.

But 2016 saw a series of erosion in valuations of the poster boys of Indian startups. Flipkart’s was the most notable one – from $15 billion down, its valuation dropped to $5.5 billion. Zomato’s got halved to $1 billion. InMobi, which was once considered a Google rival in the digital advertising space, witnessed its key investor SoftBank writing off $200 million of its investment in the company.

According to experts, one of the main reasons was the advent of large global competition, with deep pockets and more technological expertise. “When global competition stepped in, Indian companies went through multiple levels of devaluation – for example in the classic case of Flipkart vs Amazon, Uber vs Ola, and InMobi vs Facebook,” said Sanchit Vir Gogia, chief analyst and founder of Greyhound Research.

Read more: Over-the-top valuations may not make sense, but don’t brand them criminal

Another analyst with a large Netherlands-based consultancy said the correction in valuation is “like shaving off the froth from the top.”

“Founders of Indian startups, which have reached a certain scale and size, will have to build for the next level,” he added.

Snapdeal co-founder and CEO Kunal Bahl is known for pivots. For the past five years, after fighting a battle of discounts against Flipkart and Amazon, Bahl is now focusing on revenue growth, better profit margins, and quality of service. “The GMV game is something we will not fight,” he said.

GMV or gross merchandise value is the total value of goods sold on a platform, excluding discounts and promotions. All e-tailers gained valuations based on GMV for all these years on the back of heavy discounts, mainly funded by venture capital companies.

Gogia, however, said the “correction” was needed. Companies raised capital at high valuations, but the business model was not sustainable. “Investors need exits, which are not possible without good unit economics,” he added.

The drop in valuation, some top-level exits, and crunch in capital led to job cuts. Companies, which once picked up graduates from top engineering and management institutes, stopped hiring. Grofers and Flipkart did not take in graduates who were placed during the hiring season, which resulted in a lot of bad blood.

Indian Institutes of Management (IIMs) and Indian Institutes of Technology (IITs) are no more the hotspots for startup hiring; they are now turning to lower level of institutes for hiring at lower salary packages.

In August, All IITs Placement Committee (AIPC), the panel responsible for campus hiring across all IITs, banned 30 companies for reneging on jobs offers. “We plan to stay away from campus recruitment this year also. It is a hassle to go to campuses and match salaries offered to candidates at campus hiring,” said Grofers’ Dhindsa, after revoking 67 offers.

Startups have agreed to settle down with graduates from institutes of lower orders for most operational works.

“We were able to recruit talent for a fair price this year. While we pay nearly R20 lakh to IIT graduates, the packages are as low as R6 lakh for non-IITians... We hired from VIT University, Tamil Nadu (VIT), Jaypee Institute of Information Technology, Noida (JIIT) and NIT Trichy,” said Arpit Kothari, co-founder of Medd, an aggregator of diagnostic labs.

As Mera Hunar’s CEO Vinay Dalal said, “Graduates from non-IITs are talent at fair price.”

While the drop in valuation, lay-offs and shift of hiring to smaller institutes have resulted in a little slowdown in the startup space, investors and founders have also realised that floundering money is probably not the best way forward.