India’s tech startups and the dearth of funding

Prelims level : Economy Mains level : GS-III Economy - Effects of Liberalization on the Economy, Changes in Industrial Policy and their effects on Industrial Growth
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Why in News?

  • The Indian government is emphasizing and celebrating its tech startups as an important component of its economic development policy.
  • Prime Minister Modi recently pointed out that the number of Indian ‘unicorns’ technology startup companies with a valuation of US$ 1 billion or more has doubled since 2021. Some sectors within these startups, such as climate tech, do demonstrate strong promise.

Funding a major problem:

  • Though India has emerged as the third largest ecosystem for startups, funding is becoming a growing problem, with the number of unicorns dropping by half in 2022.
  • One of the sectors that appear to be not doing very well is the Indian online tech startups.

Present status of Indian tech startups

  • Good performance during the pandemic: These Indian tech startups did very well during the two-year-long pandemic. With the dramatic increase in work-from-home (WFH) office interactions, online consulting for various services but especially heathcare, online classes at schools and colleges and other educational centres, and other online services and platforms proliferate.
  • Indian techs became popular for online services: Overnight, technological solutions and electronic communications using virtual platforms, digital payments system, video consultations and edtech all became popular.
  • As people returning to normal lives Indian techs looks weak: But with the pandemic now relatively under control and people returning to normal lives, the future of Indian startups that provided online services is beginning to look bleak.
  • Negative assumptions: Going by recent media reports, the future of such tech startup companies is not so bright. Funds are drying up and not all startups are going to survive.
  • Global uncertainties adding up to the existing problems: Further, issues like the Russian invasion of Ukraine, a spike in global inflation rates, and fears of a possible recession have also brought down the prospects for many startups in general.

Impact of shortage in funding to tech startups

  • Complete shutdown of many startups: Shortage of capital that is critical for the startups to sustain has led to cost-cutting measures with layoffs, mergers and consolidation and even complete shutdowns of some of them.
  • Shut down as it unable to find market fit product: According to Inc42, a tech media platform, eight startups shut shop in 2022. These include Matrix Partners-backed SaaS startup, Protonn, which closed its operations in January 2022 since it was unable to find the right product-market fit.
  • For instance, the funding case of Protonn: Protonn was a Bengaluru and San Francisco-based startup, focused on providing its platform to professionals such as lawyers, graphic designers and nutritionists to launch their businesses online, create videos, conduct live sessions, generate payment links, and track their business’s financial performance. The company had raised US$9 million in seed funding. The company, founded by former Flipkart executives, Anil Goteti and Mausam Bhatt, returned US $ 9 million to its investors.

Problem faced by edtch startups in a post pandemic world:

  • A case of edtech startup Uday: Uday ended its operations in April this year. The Gurgaon-based startup had difficulties finding ways to stay in business in the post-pandemic world. The startup co-founder, Soumya Yadav stated that the company was witnessing the post-pandemic world for the first time, as the kids went back to school, we faced roadblocks in growing the original model of online, live learning. We evaluated multiple different strategies and adjacent pivots however none of them were promising enough.
  • Financial crunch and laying off the employees by well-established edtechs: Edtech startups such as Vedantu and Unacademy are also facing severe financial crunch, leading to hundreds of layoffs or shutting down certain verticals.
  • Vedantu for instance: Earlier in the year, Vedantu laid off around 620 employees. Unacademy, earlier in the year, shut down its medical test preparation vertical, USMLE.
  • Unacademy laying off its verticle: As of November, Unacademy has done three rounds of layoffs, starting with 600-800 employees from its sales and marketing team.
  • Byjus: Byju’sa rival of Unacademy has also felt the pinch and is reported to have laid off close to 2,500 employees.
  • SuperLearn: Another startup in the education sector, a Bengaluru-based SuperLearn, shut its operations in June because of “a dearth of funds and diminishing investor confidence.”

Other positive side of the startups

  • Biotech and healthcare startups did well: While the edtech is possibly the worst hit, startups in the biotech and healthcare sector and e-commerce and fintech may not be as badly affected in the coming year.
  • Healthcare startups not only survived but also benefitted: Several startups gained from the inadequacy of the Indian healthcare system and thus phenomena like online pharmacy, healthcare-at-home services, and fitness and wellness companies have sprung up and they are likely to stay.
  • Funds received by healthcare startups will be helpful: Healthcare startups reportedly received funds of around US$2.2 billionn across 131 deals. They also appear to have found an appealing business model that might help them pull on with reasonable success in the coming years.

Way ahead:

  • Nevertheless, there is a likelihood that after seeing a boom and a significant spike in the demand in these sectors in the last two years, there may be some balancing in the next two years.
  • Another possible way that startups will deal with the financial crunch, lack of adequate response is to consolidate the several different edtech and e-commerce platforms and so, one could expect a few merger and acquisition to come through in the coming years.
  • Enterprise tech sector saw some of this playing out already. Startups, at least within a few exclusive sectors, have gained fair amount of prominence and appears that they are here to stay despite the possibility of a rough couple of years until issues around funds and market are evened out.
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