India's Startups and the financial Storm

It’s been a glorious decade for start-ups, VCs and PE Funds in the form of cheap funding. Startups burnt a lot of cash in myriad of?ways and industries to prop up innovative services and products. Investors tolerated the losses in hope of making another Amazon. With immense dry powder at the beck & call of #disrupters, talent markets became highly distorted with stratospheric salaries and promising ESOPs. Tech companies’ ascendancy grew during the pandemic as if the world had changed forever. As if, no one will ever go back to a brick & mortar office or dine at a restaurant or go to a theatre. At the same time, Governments poured out cash by printing enormous amounts of money. By some counts, 9 trillion dollars, in the US alone. That’s three times India’s GDP!

Then, very quickly things started to change. The pandemic started to recede, inflation sky rocketed, #supplychain snarls reduced, demand for physical services came back with a vengance. To combat spiralling macros, Central Banks started to rapidly raise rates (perhaps too quickly), which meant that suddenly capital has become expensive and opportunity cost for invested funds has risen. The private equity industry has started to wake up to a new reality, which cannot be fuelled by cheap debt, nor a relentless flow of investor capital. Now, investors have started to demand returns, if not immediately, then in the very near future.?

The current scenario has been summed up by #SridharVembu’s tweet - “startups that got hyper inflated valuations in the bubble now face the prospect of having to ‘defend’ those valuations. This translates to price increases for customers & cost cutting for employees, resulting in poor customer satisfaction & employee morale. Bubbles do damage”

While lay-offs hurt, but they are also free market’s cruel way of resource re-allocation. In certain ways, these tumultuous times will ultimately go on to benefit that part of India’s IT industry which has become the world’s digital backbone. I vividly recall interactions on stratospheric salaries with some of India’s senior most IT managers in the biggest IT companies, who were working on projects in Indirect Taxes for the Government. They were all lamenting about attrition rates, and unavailability of talent at the entry pay scales, which in turn were badly affecting project costs. One anecdote has remains etched in my mind when a senior manager exasperatingly narrated that their company could not compete with sign-on bonuses such as BMW motorcycles. Those days a news report about #BharatPe had created a huge buzz in the industry. (https://www.livemint.com/companies/news/bharatpe-is-offering-bmw-bikes-other-perks-to-joinees-as-it-ramps-up-hiring-of-techies-11626687705936.html)

Startups have come up with innovative ideas, but many have simply replicated, if not plagiarised someone else’s model. With high cash burn, costs have been artificially subsidised. During boom times, no one felt the need to make sure the offering could be rolled out like a real business and make money. It was enough that is was an online model. A recent piece by Brooke Masters , published in Financial Times on 8th Feb on the closure of Amazon’s brick & mortar stores in US does excellent justice to this issue.