Bearish markets likely to see churn in Indian startups

E-commerce companies are managing cost efficiencies due to lower inflation and also because of lower oil prices. At the same time, these companies are spending more money on advertisements and also betting on lower selling prices for customer acquisition. The net result is a negative payoff. If startups are not supported by market participants, it will be very difficult to mitigate the financial risk.

Innovation is the key to make enterprises successful and also sustainable in an uncertain market environment. The global markets are looking excitedly for the new products and services. Startups are the main reason for this trend. This in turn is encouraging markets to invest in such ventures.

If everything goes well, markets will have bull run instead of the present bearish run. In fact, it will not be so easy to make markets ride on bull run without supporting and encouraging startups to perform in a highly competitive global markets.

The big e-commerce giants Amazon, Flipkart, and Snap deal are losing profit margins with every passing day, by incurring huge losses due to the severe competition in offering discounts and also due to price war in attracting customers in Indian markets.

The renowned global social media networking companies like Twitter and LinkedIn are also reporting consecutive losses in global markets. The old e-commerce search engine players from India like Just Dial and other similar ventures have not been reporting progress in their businesses, for the last two years. This is due to the weak business models, an ongoing competition and also rapidly changing business environment through technology.

Under such challenging circumstances, sustaining the growth of Indian startups would be crucial. The Indian startups growth is getting severely affected. They are finding it difficult in achieving the three essential financial indicators. They are Cash, Run rate and Annual Revenue.

The first indicator i.e. Cash is everything for startups because it is the lifeblood of the company. The second indicator i.e. Run Rate explains about Annualized Run rate (ARR) and also about Annually Recurring Revenues (ARR). The last indicator is Annual Revenue, which deals with revenue recognition.

The well-known Indian startup establishments are finding it easy by getting funds globally. For example Soft Bank, which is a major Japanese telecommunications company, has become the largest investor in the Indian e-commerce segment. Soft Bank, made investments in Housing.com, Snapdeal.com, and also in ANI technologies’ taxi-booking service Ola Cabs and etc, even as a large number of startups are finding it difficult to procure funds.

Venture capital firms like Sequoia Capital India, Blume Ventures, Accel Partners and other firms in the country are making investments aggressively in some of the startups.

The venture capital firms are investing in startups as accelerators, incubators and as co-working spaces. But due to the present bear run in the capital markets, worrisome situation is there even for such firms. The angel investors and high net worth individuals from India are continuing their investments in the feasible startupsacross the globe.

On one hand, we are talking about startup growth, and on the other hand there is bear run in global financial markets including Indian financial markets. This is leading to a stressful situation for startup investors and also stakeholders.

Will startups sustain without bull run in financial markets? Even the successful e-commerce ventures are finding it difficult to raise money to sustain their businesses in Indian scenario.

What if the current turmoil situation in global equities and commodities markets, and also uncertainty in financial markets continues, which can terribly ruin the journey of startups? This raises the concern of sustaining the startups. This will be a big a challenge.

Valuation experts believe too much of uncertainty is not good for an economy. They also say valuing startups would be very difficult and also result in undervaluation of startup ventures. This will be leading to the result of underperformance of venture capital firms. After which, the future of startups will be in the hands of venture capital firms, and to protect their financials, there will be mergers & acquisitions on this front.

It’s been evident in the case of a few reputed venture capital firms that are approaching investment banking companies to protect their financials and also mitigate their risks.

E-commerce companies are managing cost efficiencies due to lower inflation and also because of lower oil prices. At the same time, these companies are spending more money on advertisements and also betting on lower selling prices for customer acquisition. The net result is a negative payoff. If startups are not supported by market participants, it will be very difficult to mitigate the financial risk.

It is a well-known fact that the Indian banks are saddled with non-performing assets. Their balance sheets are already stressed because of the reasons which are well-known. In such a scenario, banks will find it difficult to provide finances to the business world. This will further curtail funding for startups.

Also financial system will become further stringent. All this would mean dwindling finance for startups. Finally, it will hamper the growth momentum of startups in India.

M Chandra Shekar & Rajesh G

(The writers are assistant professors at Institute of Public Enterprise, Hyderabad)