2022 has been a tumultuous year for the startup ecosystem so far. Where on one hand, we've gone from being accustomed to seeing a new startup join the coveted unicorn club every so often in 2021 to coming to terms with devastating layoffs, on the other hand, there have been some success stories in the form of Physics Wallah, Fractal.AI, LeadSquared and Darwinbox among others. The startup space, notorious for its volatility and sharp ebbs and flows, warrants a closer look. Hence, we'd like to narrow down our scope, and throw the spotlight on key developments that happened this month.
While the huge trough that startups have hit might not be a shocker to most of us. An article on Crunchbase News titled, 'Have Valuations Really Fallen Off a Cliff in 2022?' provides a deeper insight into global funding, valuations, market sentiment and more. It's really a 'one man's trash is another man's treasure situation'.
Given that global funding has slowed since March (-14% MoM), and the public market downturn stretched into the second quarter, contrary to the gold rush last year, founders have reported difficulties in raising funding for their startups. However, an environment characterized by low prices and less competitive funding rounds might actually be better for investors. Aside from the obvious monetary benefit, investors can now buy more time for due diligence and background checks.
But this still begs the question: How severe is the downturn really? You might be surprised to know that the startup "winter" isn't as chilly as one might make it to be. And, Crunchbase has provided statistics to prove the same.
Amounts are on par for each fiscal half-year since 2021, averaging between $88 million and $89.5 million. These rounds are up from the $62.8 million 2020 average.
For now, companies that have announced their Series A, B and C funding in H1 2022 have not shown a serious dip from the peak of 2021.
Check out this infographic (data as of 23rd June 2022) to analyze how U.S. Series A to C funding in H1 2022 have fared when compared H1 18 through H2 2021.
Disclaimer: Not a "startup" trend, or even a trend, as such, but it is still worth noting as it pertains to all equity investors.
As reported on 8th June 2022 by The Economic Times, The Reserve Bank of India (RBI) hiked policy rates by 50 basis points to 4.90 per cent in its bi-monthly meeting.
The rate hike will entail – (a) increase in bank interest rates (b) companies having to shell out more to raise money from banks and markets compared to earlier.
The primary motive behind the rate hike is to dampen the impact of the ever-increasing inflation and bring it down below the pre-pandemic tolerance levels. Even though the markets turned positive, and the 10-year bond yields went down and even turned negative, Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers. cautioned that the higher than expected rate hike might have some negative influence on equity and bond markets.
Now, one might wonder what angel investors have to do with any of this, considering ET's strong focus on BFSI and consumer markets in the article. Angel investors, being both high net-worth individuals (HNIs) and a form of equity investors, invest in high-risk companies. So, it makes sense for them to require a rate of return significantly higher than that of RBI's policy interest rates. Theoretically, the Capital Asset Pricing Model (CAPM) might explain the kind of rates they would be looking for with respect to the risk-free rate (impacted by the Central Bank/Fed), market risk premium (risk above investing in risk-free assets) and market beta, among other quantitative and qualitative factors.
An anomaly in the chaotic startup ecosystem, Alakh Pandey and Prateek Maheshwari led EdTech platform stood out as a dark horse on 8th June 2022. The startup became India’s 101st unicorn after raising $100 Mn (INR. 777 crores) in a Series A round from WestBridge and GSV Ventures, at a valuation of $1.1 Bn. Post obtaining the unicorn status, PW now aims to build offline centres, having already instituted 20 centres in 18 cities so far.
Just a few days after PW's success story, this Mumbai-based online beauty retailer became India’s 102nd unicorn after raising $33 Mn in a Series E funding round, at a valuation of $1.1 Bn. Purplle has raised a total of $215 Mn so far. Though still a loss-making company (net loss: INR 51.27 Cr in FY21), it is targeting an annualised Gross Merchandise Value (GMV) rate of $180 Mn in FY22.
India's 103rd unicorn became the first of its kind to bag the title without any VC funding, as reported by Forbes India on 21st June 2022. Led by WestBridge Capital, the success story of the Sales Automation SaaS platform offers a boost of optimism to angel investors and PE investors. With $153 million raised in the Series C round, it is now looking to double its revenues in FY23, and double down on investments in India and North America. Nilesh Patel, the co-founder and CEO of LeadSquared, also hopes to expand its operations to Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA) to embellish its product portfolio, fund its acquisition plans and increase its customer base by 70%-80%.
Emphasizing the role of angel investors, Patel said, “We are probably one of the few companies that managed to raise Rs 17 crore from angels," underlining that the company never faced a capital crunch. The next step could entail launching an IPO, but the primary focus, as of now, is on growing the startup.
With Sequoia-backed Aqgromalin and crypto-exchange Valud laying off 30% of their staff each; Polygenius and Klarna losing 25% and 30% of their valuation respectively; and Stripe holding off its IPO launch, it is no secret the global economic downturn has threatened FinTech growth. However, speaking from an Indian perspective, it's not just valuations or layoffs or IPO delays but the new RBI policies that have proved to be an impediment to the progress of the industry. Angel investors should not keep abreast of the new developments, but be wary of the same as well.
Even though promising and established startups have helped bridge the unequal access to credit in India, which is exactly why UPI and BNPL models have garnered immense popularity, the absence of real revenue from e-payments or neo-banking has always been a cause of concern to the RBI due to the looming danger of a debt trap for consumers and merchants, who can now obtain credit without robust risk assessment mechanisms. Additionally, RBI fears the issuance of credit to a “less deserving population” as per the new credit guidelines.
To solidify its stance on the questionable business models of FinTech companies, the RBI issued a notification prohibiting non-banking companies to load prepaid instruments — digital wallets or stored-value cards — using credit lines. In layman terms, the RBI is not a fan of the "buy now, pay later" shtick. This move has sent the FinTech industry into a tizzy due to the lack of clarity on whether they fall under the ambit of the new guidelines, and the inevitable dampener on the industry's momentum should the notification apply.
Given the 30% tax on income from crypto; 1% TDS on crypto asset transactions; and the fact that BNPL provider Sezzle had to exit from the Indian market, the industry has suffered from several blows this year. Many people have opined that adequate leeway should be given to new-age financial services companies to provide innovative products and services to end consumers and deliver value.
So, what's next? It's difficult to say how much credit will dry up, if at all, due to the lack of data via UPI or BNPL route. In fact, some have deemed it a welcome change. Ashok Hariharan, founder and CEO of IDfy; and Bhaskar Chatterjee, VP, Product Management of EzeTap claimed that RBI's decision would help bridge the trust gap between FinTech companies and customers. Moreover, the industry can breathe a sigh of relief as RBI is working on Payment Vision 2025, with an aim to increase the number of digital payment transactions by more than 3X by 2025. The glory days of the 50+ billion industry aren't quite over yet.
Is the market grim? Sure. Is the funding winter still prevalent? Also, yes. There are undeniably more than a few causes of concern with the way the start-up ecosystem is headed (layoffs, increase in policy rates to stymie inflation, falling valuations, you get the gist). However, we can't discount the success stories in the form of PhysicsWallah or LeadSquared, or the encouraging statistics that Crunchbase has left for investors. Having said this, the negative market sentiment will surely persist for months to come, maybe more, maybe less. But perhaps, in the midst of this doom and gloom, even more surprising success stories, underdogs and dark horses will emerge to assuage the fears of entrepreneurs and investors alike.
Our advice to readers: Be cautiously optimistic.
Credits: Tarun Singh for illustrations