Startups Getting Devalued And Revenue Targets Being Lowered: A Sign Of Another Recession?
Even a decade ago, if somebody wished to quit a high-salaried job just to venture into the startup arena, the world would look down upon him. However, things have changed to a great extent over the years. The startup revolution reached an all-time high in the past few years, with some of the highly talented individuals pitching in their startups.
So, what is it that initiated this unsurpassed growth and development of the startup arena? Let’s turn to statistics, shall we, for crystal clear insights into the matter.
According to recent reports published by the United Nations, India leads the chart when it comes to offering citizenship to the youth. Statistical figures state that the country has the largest youth population in the world, which is almost close to 356 million. Quite naturally, the uncompromising, promising, unapologetic, and highly energetic youth of this country always dream of launching their own business ventures, rather than giving wings to somebody else’s desire.
The current scenario
These reports and insights speak a lot about the present situation of the startup arena. If the current market trends are anything to go by, the Indian startup market seems to be going through a rough patch. While it’s too early to say whether the golden era has come to an end or not, trends indicate towards a major devaluation. It’s here that we need to take a look at the current changes in the ecosystem.
Tracking the crucial changes
When it comes to defining the characteristics of the Indian startup market, ‘unpredictable’ is the best word to use. While 2014 witnessed the entry of some of the potential market leaders including hyperlocals, food-tech startups, and aggregators, 2016 hadn’t been a pleasant year until now.
Apart from the reduced financial inflow, quite a few startups are heading towards conglomeration and mergers. On the other end, some of them are resorting to the extreme measure of shutting down forever.
Market reports also reveal that there has been a whopping 24% reduction in investments in Indian startups. Quite naturally, such situations have led to a major devaluation. The following discussion will help you track the crucial changes in the current funding scenario.
1. Shift of focus
When you are planning to launch your startup, it will be imperative to know about business unit economics. According to the formal definition, ‘business unit economics’ refers to direct costs and revenues associated with a targeted business model. The basics of this concept include:
- Cost-per-acquisition or CPA: The cumulative cost to acquire a single unit.
- Lifetime value or LTV: Revenue generated by a single unit throughout the customer’s service usage duration.
Even if LTV exceeds Cost-per-acquisition, investors and business owners can find business opportunities. In a nutshell, ‘business unit economics’ happens to be the indicator of profitability and success.
2. Down-round funding
Down-round funding refers to the process of investing at lowered valuations. Investors make fresh rounds of investments after a devaluation phase. E-commerce giants like Zomato and Flipkart are having a hard time maintaining their market valuations in the face of dynamic changes.
If present market trends are anything to go by, the time isn’t far away when this concept will stay in the startup market permanently. However, the concept isn’t undesired, as it leads to successful and maximum resource utilization.
3. The rise of underdogs
The previous years have been the time for frantic investments. Investors were more than happy to invest in exorbitantly valued market biggies. With significant changes in the market forces, investment trends seemed to have taken a U-turn.
Investors are planning to invest in small-scale ventures capable of sustaining the down-round funding period. While looking for such ventures, they are emphasizing on the presence of sound bases and robust business models.
4. Acquisitions, mergers, and conglomerations
Resource centralization seems to be the buzzword in the startup arena at this moment. Take a look at the e-commerce sector, and you will come across countless mergers and business acquisitions. These conglomerations result in the centralization of investments, thus ensuring profitable opportunities for investors. They have the opportunity to enjoy the benefits of optimum resource and market share utilization.
5. Victory of conventional business models
Going by the present trends, there has been a major shift in human resource management and utilization. Numerous startup employees are making a shift to conventional business models. With severe funding crunch, startups are failing to live up to the promises made by them.
Employees are working more than their paybacks and even sacrificing their incentives. Quite naturally, this isn’t going down well with many middle-level and senior employees, thus resulting in the shift.
6. Failures aren’t building pillars of success
Over the last six months, there has been a dramatic surge in startup failures. Things will be crystal clear if you take a look at what happened to promising startups such as Townrush or Peppertap. Numerous startups have either shut down or reduced their operations because of low revenues.
Startup owners have a highly crucial role to play in this context. Success and failures are integral aspects of entrepreneurship, and every startup owner should keep that in mind.
Assessing the current scenario
With that detailed discussion on the critical changes in the startup ecosystem, it’s high time to assess the current scenario. Here are some crucial insights to consider:
According to Government reports, India happens to be the breeding ground for almost 19,000 tech-enabled startups, a majority of which include financial service and consumer internet startups. If you take a look at the first quarter of 2015, you will come across astonishing figures.
- Reports reveal that the total funding raised by Indian startups was around $3.5 billion.
- The same report also reveals a lot about the rise in the number of investors. While the number was 220 in the year 2014, it more than doubled to 490 in 2015.
- Reports published in the last quarter of December indicate towards the presence of eight startups in the ‘Unicorn’ club.
- The venture-capital backed startups in India received a funding of 82,500INR ($12 billion) across a whopping 1220 deals.
- In 2015, the funding amounted to $7.3 billion invested across 880 deals.
These reports from Tracxn reveal a lot about the current scenario. Although it’s not doomsday for the startup market, ‘exits’ have already begun. Startup owners should be aware of these market forces, changing trends, and economic scenario, thus taking the right step at the right time.
Identifying the biggest hit by this impact
The sudden devaluation of the startup market is creating ripples and sending shockwaves across the startup landscape. Down-round funding will take charge and B2C startups will bear the brunt of massive devaluations. As of now, B2B startups will not face critical challenges. Although their market value will continue to decline, they won’t have to deal with down rounds.
So, who are the people facing such challenges? Let’s find out.
1. According to experts like Sharath Naru of Ventureast, multichannel distributors in the B2C arena won’t be facing too much of a problem. However, internet-only startups will be suffering the most.
2. Devaluation will not show up in the initial phases. It’s only when the company shares convert that investors and business promoters will come across the disadvantages.
However, we simply can’t ignore the fact that growth and development are taking place at a reduced pace. Therefore, startup owners will always have the opportunity to consider loan options whenever they face a shortage of funds. As a result, devaluations might not occur and felt so quickly. The effects will be gradual, and everything will seem normal in the beginning.
Can devaluation be beneficial?
Devaluation can also prove to be beneficial to some extent. Some of its amazing benefits include:
Identifying niche: Startup owners will strive to carve a distinctive niche for their business, as there won’t be any frantic investments.
Improving efficiencies: Companies offering cost-reduction benefits will also benefit from such devaluations.
Effective analytics: Targeted analytics will be important as startup owners won’t offer discounts to anybody and everybody. Analytics will lead to highly successful business marketing.
Opportunities for venture capitalists: Strategic investors and venture capitalists will have better investment opportunities. Foreign funds, local funding, along with corporate investments will find the best markets. These investors are always ready to make crucial investments in profitable sectors.
Long-term promoters: These people should also make valuable investments, as that will fetch astounding benefits in the long run.
With these benefits, you can’t say that market devaluations won’t have positive impacts on the startup market.
It’s true that the startup market is going through a rough patch and devaluations are creeping into the scenario thus affecting the market economy. However, we also can’t deny the presence of business growth. In a nutshell, it’s not yet time for remorse. Although devaluations are taking place, it’s ensuring some benefits too.