Why the slowdown might in fact do the Indian startup ecosystem good

The Indian startup ecosystem is witnessing one of the hottest summers of the past few years. As the third largest ecosystem in the world, its inhabitants have been in search of new resources of liquidity to ensure their survival. If early signals hold any truth for the foreseeable future, the present funding scenario can turn out to be a drought, which can last for some time to come.

In February this year, Morgan Stanley reduced the valuation of India’s biggest unicorn, Flipkart, from $15.2 billion to $11 billion. Data from VCCEdge shows that in the first three quarters of 2016, compared to the same period in 2015, the number of venture capital deals have fallen from 138 to 88, and the total value of venture capital invested has taken a drastic fall of over 80 percent, from $1.8 billion to $334 million.

There is a general sentiment of caution, due to factors such as an uncertain global economy, a slowdown in China, expected increase in interest rate in the US, and a private vs public valuation disconnect with disappointing initial public offerings (IPOs).

Due to the slowdown in the Chinese economy, on the flip side, Indian startups have attracted the attention of prominent Chinese investors that include Fosun Group, Xiaomi’s founder Lei Jun (Shunwei Capital Partners), Cheetah Mobile, Baidu and Tencent.

However, they are also treading with extreme caution after observing the funding decisions of US-based hedge funds in India. According to Aditya Rao, chief executive of the services startup LocalOye, “These are definitely testing times for the startup ecosystem… 2016 is the year where everyone is trying to re-evaluate their strategies and put a strong focus on revenue and margins more than anything else.”

Since employee costs in India’s leading startups account for more than 35 percent of cash burn rate, facing paucity of funds, startups have started pruning the head count of employees.

Over the past several months, online marketplace Snapdeal, restaurant discovery platform Zomato, and auto classifieds CarDekho have let go of hundreds of employees. Other than just firing employees, they are also tweaking their hiring strategies; the number of job offers by startups hiring graduates from the Indian Institute of Technology has reduced drastically.

Even employees with work experience are not spared, the compensation packages being offered are down 50-60 percent. The average pay for hires is down to $5-7 million from $10-15 million, and salary offers of more than $10 million have fallen to 100 from 500 in the previous year.

Founders have been left with little alternative than to accept this slowdown to be the new norm. This includes:

Watchful investors

Preference is being given to quality over quantity, founders are becoming better at managing capital and improving the efficiency of each rupee spent. Early stage startups are finding it easier to survive and grow, as the funding requirements at that stage are lower with the concept not proven.

Norwest Venture Partner’s Mohan Kumar says, “Capital as a barrier is giving way to companies that have good execution, great product and path of profitability. Such companies will get funded and need not worry. This trend is actually very good for entrepreneurs.”

New systems and processes

Since change is the only constant in business, founders need to constantly innovate in order to set up effective communication lines with investors and employees.

HR policies are being formulated to ensure increase in productivity, morale and efficiency of employees under pressure. As companies are revising their growth metrics, lots of ecommerce companies, such as Snapdeal, are moving away from the Gross Merchandise Value (GMV) to customer-centric strategies on their platform.

Reforms

New funding sources