India has witnessed exponential growth of startups in the recent years. The opportunities & gaps identified by the startups addressed core areas such as education, healthcare, logistics, consumer, financial sector etc., especially during the pandemic. Technology was integrated in the offerings so as to ensure seamless last mile delivery in an effective as well as cost effective manner. The funding support from investor community (domestic & global) also witnessed a similar surge. An optimistic environment backed with bullish outlook to support growth and capitalize on the opportunity, got the startups to command unimaginable valuations. The number of unicorns during the initial period of the year 2022 crossed 100. The faith and belief of the investor community infused confidence in the startups to fuel growth and create a significant impact on the economy. However somewhere along the line, the eco-system also witnessed certain instances of instability in the startup eco-system such as large lay-offs to manage costs, ballooning loses, inability to honor commitments related to purchase price & equity infusion, discord between founders & investors, non alignment of thoughts amongst founders and board members, litigations filed in consumer forums for noncompliance of terms & conditions, negative reviews on the public platforms as regards the quality of services or other committed terms etc.
Recently a study titled wealth creation study report was conducted by a reputed broking firm, where in the current status of 500 active businesses in existence for 25 years was examined. Out of the 500 companies, about 100 companies created wealth of more than 9% to investors, while the rest were below 9%. Some of the primary reasons the 100 companies created wealth, are quality of business, quality of management, growth trajectory etc. The fundamentals of business were the key drivers for sustenance of these businesses. Businesses constantly need to evolve change and adapt with the VUCA world, successful businesses have imbibed this ability by building strong fundamentals through value creation for all stake holders. The valuations of these businesses showcase value creation leading to valuation. Value creation implies creating value to all stakeholders viz investors, customers, employees, service providers and others in the eco-system. The value creation process has short terms and long-term impacts. However, the key being building sustainable business which is profitable. Profitability of business depends on various factors both internal and external to the company. While managing the external factors is very challenging, managing internal factors though less challenging, would significantly depend on the founder’s style of doing business and the culture of the organization.
The startup eco-system has exhibited the ability to innovate solutions to solve societal problems with great agility, breakthrough technology and with unique business models especially during the pandemic. All the stakeholders including the policy makers rose upto the needs and supported such startups with resources including funding support to reach scale. Considering the market opportunity, the growth trajectory had to be scaled at lightning speed, and this got the investor community to bet on the founder’s competence at scale. Businesses were valued based on unconventional methods, the market witnessed instances of hyper valuation. The merchant bankers structured unique methods beyond the traditional methods of valuation such as income, market or asset valuation. Ecommerce companies, edtech companies etc incurring operating losses were funded by investors with the belief that in the long run these companies would start earning profits. While the losses are a concern, the journey towards profitability and building sustainable business based on fundamentals always remain paramount. The bullish outlook of the community in supporting startups witnessed surge of funding by way of equity, debt, quasi equity and other forms of instruments. The startup eco-system also witnessed companies like Zerodha, Zoho growing steadily without resorting to external funding as a strategy.
Recent press releases indicate a funding slowdown during the second quarter of 2022 by about 40% due to macro-economic reasons including rise in inflation rates, the sentiments of the investor community have become conservative with tough negotiations on valuations with multiple follow-on rounds. The eco-system is witnessing M&A transactions and consolidations as inspite of compelling value proposition offered by the product/solution, sustainability at scale is a cause of concern. Cash flows are under tremendous pressure, margins shrinking, and fresh funding is drying up. Well known, startups like Meesho, Cars 24, Unacademy have rationalized their business models, costs were managed by laying off employees, delay in recruitments, appraisals etc. The founders are facing tough questions about path to profitability and rate of profitability. Common question now being asked by the investor community to the founders has now changed to “what is your profitability rate?” from the earlier “what is your burn rate?” The intention in all fairness is to support the startup sustaining its operations during growth journey. However, there is a growing trend amongst the same community to understand the earning rate or path to profitability.
The funding winter has brought about course correction in the eco-system by normalizing over valuations and greater focus on building fundamentally strong, profitable businesses which will continue to create value for each and every stakeholder. The process of value creation over a period of time in a sustainable manner is automatically set to create an intrinsic valuation of the businesses which is fair to all stakeholders. The aspiration of 10 trillion dollar Indian economy would require the backing of businesses with strong fundamentals. Such businesses would automatically fetch realistic valuations. The course correction in the eco-system has brought in more sanity amongst the community and one can predict sustainable businesses emerging stronger in due course.
Genuine Value creation would give a lifetime valuation for companies
Superb