The Indian Start up Bubble

With slow-down in IT sector worldwide and in times of business consolidation for most of the IT companies, does the era of COVID induced start up ecosystem coming to a halt? The booming IPO frenzy in 2021 for tech based new start-ups are increasingly finding lesser buyers. Now questions are being raised over the sustainability of business models. Comparisons are being made with dot com bubble of late 1990s which led to severe market crash in US economy.

Indian start ups

India is home to 103 unicorns with a total valuation of $ 335.80 Bn. The year 2021 alone itself witnessed the birth of the maximum number of Indian unicorns with 44 companies reaching coveted status of unicorn. Pandemic has induced need for digital transformation, automation and cost cutting across industries including e-commerce, ed-techs, logistics, SAAS & financial services. Out of the total number of unicorns, 44 unicorns with a total valuation of $ 93.00 Bn were born in 2021 and 19 unicorns with a total valuation of $ 24.70 Bn were born in 2022.

However, within six months year 2022, with piling up losses, very low margins and recession looming in hindsight, the future for Indian start-ups is looking bleak.?Almost 12000+ job losses have been reported in current year till Jun’22. Is there any risk associated with Indian start-ups. Do we see any similarity of great rise of Indian start ups in history?

Dot com bubble

The dot-com bubble, also referred to as the?Internet bubble, refers to the period between 1995 and 2000 when investors pumped money into Internet-based startups in the hopes that these fledgling companies would soon turn a profit.? At that time, the increasing popularity of the Internet triggered a massive wave of speculation in new age internet-based start-ups. As a result, hundreds of dot-com companies achieved multi-billion dollar valuations as soon as they went public. Outrageous valuations of these companies relative to their intrinsic values led to share market crash. The technology-centric NASDAQ Composite Index rose from less than 1,000 in 1995 to a peak of 5,408.60 on March 10, 2000.

Among the estimated 48% of the dot-com companies that survived through 2004 are current Internet giants Amazon, eBay and Google.

Are Indian start up bubbles?

A rise in internet users during the pandemic, unprecedented growth, and a rapid bounce-back from lockdown has taken deal-making back to its heyday. Growth is always the top priority, despite the high prices and occasionally weak indicators. Values are defined by demand and supply, the need to invest quickly, the fear of missing out, and the excitement brought on by growth, not necessarily by fundamentals like forward revenue multiples or share price to earnings.

November marked India's first disappointment with when SoftBank-backed payments app Paytm crashed 27% at its debut, triggering criticism it had overvalued the company without prioritising profitability. Paytm has plummeted a further 60% since then. Losses are only piling up at around 2400 crores in FY22 and serious restructuring is needed in revenue model.

And while Indian food delivery firm Zomato and beauty retailer Nykaa had blockbuster listings, their shares are down 65% and 40% from their peaks, respectively. Zomato reported loss at 1209 crores in FY22, up by 45% than last year and Nykaa reported contraction in already low profits. Now investors are increasingly pushing for growth objectivity and profitability.

Online learning firm Unacademy has revenue of about Rs 350 crore in FY21. But, it is valued at around $2 billion (Rs 14,000 crore), about 35 times forward revenue. Even Byju’s, India’s most valued edtech startup is valued at around $12 billion with about $700 million in expected revenue, but far lower multiple of 16-17 times. Now both the firms are talking about doubling down on their offline study centres in response to cope up transition in post COVID world.

New age fin-techs especially based on crypto possess a risk to markets as well. Their sky rocketing valuation with little regularization ?can be a threat to market. Take fintech for instance, Cred, BharatPe and Khatabook who have never seen lights of profit. Bhartpe is another story where corporate governance and business ethics have been questioned among breeding startups.

Digital use has exploded in a level that even bullish investors didn't anticipate a year ago, thanks to Jio, UPI, and now the pandemic. And as a result, businesses ?will be valued for the future and prices can be higher than many expect. However, prices didn’t always reflect underlying business performance. Many of the new tech startups aren’t profitable or even in near future, but investors ignore poor fundamentals and warnings about overvalued prices. Asset bubbles like the dot-com bubble can have different causes, but the thing they tend to have in common is that investors’ extreme enthusiasm leads them to throw caution to the wind.