Context

The startup ecosystem which has been in overdrive for the past few years — propelled by a combination of factors, but largely, by the era of cheap money — is now showing signs of weakness.

Factors that helped fuel the tech startups

• With the combination of accelerated financial inclusion (bank accounts), ease of identification (Aadhaar) and connectivity (mobile phones) it was said that it is ultimately a bet on the Indian consumer, and the economy, not on government regulations/policies.
• Low-interest rates: In the era of cheap money and negative real interest rates, uncomfortable questions over the true market size and profitability were swept under the rug.
• Growth fuelled by cash burn: High cash burn rates were the norm as both startups and investors sought growth by subsidising the customer.

What is going wrong?

• Lack of profitability: Among the startups that have gone public in recent times, Paytm’s losses stood at Rs 2,396 crore in 2021-22, while for Zomato and PB Fintech (PolicyBazaar) losses were Rs 1,222 crore and Rs 832 crore respectively.
• Drying-up of investment: Sure, investors will continue to pour money.
• Some early age start-ups will continue to be funded, as will some of the more mature ones.
• But investors are likely to be more circumspect in their dealings.
• Impact on valuation: There are also reports of startups in diverse markets, ranging from Ola to OYO, planning to raise funds at lower valuations.
• Among those who have gone public in recent times, most are trading much below their listing price.
• Tighter financial conditions, a re-rating of the market, will impact both fundraising efforts and valuations.

Lack of discretionary spending capacity

• Many numbers were given as indicators of the size of the market or TAM (the total addressable market).
• Smartphone users: One such number thrown around is the smartphone users in the country — some have pegged this at 500 million.
• UPI transactions: The transactions routed through the UPI platform — in May there were almost six billion transactions worth Rs 10 trillion.
• Bank account holders: We have the near universality of bank accounts.
• But in reality, for most of these startups, the market or even the potential market is just a fraction of this.
• There aren’t that many consumers with significant discretionary spending capacity, and those with the capacity aren’t increasing their spending as these companies would hope.
• No increase in spending: What is equally worrying is the complete absence of any increase in spending by even these consumers who would have the capacity to spend more.
• While more consumers are on-board digital payment platforms — Paytm has about 70 million monthly transacting users — these numbers suggest that when it comes to consumers with considerable discretionary spending, the size of the market shrivels considerably.

Conclusion

Tech startups are about to witness a tough time ahead. Some startups will survive this period. Many may not. And changes in the dynamics of private markets will also have a bearing on public markets.

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