With thousands of layoffs, plummeting valuations, salary freeze, a funding winter and ugly public spats, it has been a difficult year for start-ups. That should make the Christmas vacation more a time of rumination than revelry. Going by recent trends, the troubles aren’t over yet; consolidation continues with 230 mergers & acquisition deals reported in 2022 so far. The bad news is that many start-ups are running short of cash, and investors are unwilling to fund them at current valuations. Start-up funding has dipped to a shade under $25 billion between January and November, a year-on-year fall of about 35%, data from Tracxn shows. Moreover, the number of funding rounds has dipped by 30% to 1,841 so far this year from 2,647 last year.
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The prospect of being unable to sustain valuations has led to at least a dozen companies abandoning their plans for raising money from the public market. Unless they are able to make their businesses viable, the funding winter could push more promoters to sell out to bigger peers. Some are beginning to see the writing on the wall. That explains the layoffs—18,000-plus at the last count, most of them in the ed-tech space. To be sure, the numbers might not be large in the context of the total workforce in the start-up space; one hears of just about 60-70 start-ups being in real trouble. Nonetheless, these are signs of how challenging it could become for those businesses that do not turn viable quickly. Despite the consolidation in 2021, we heard little about job losses, but now investors seem to be turning cautious. Even those companies that have been around for a while aren’t able to convince their investors to continue to support them. Late-stage funding, or capital injected into established businesses, fell a sharp 45% y-o-y to $16.1 billion in the January-November period.
Some of this could be the fallout of the disastrous performance of listed start-ups. Most of the start-ups that listed in 2021 and 2022 continue to trade way below their initial public offer prices. Some like One97 Communications saw a disastrous debut, but even other new-age technology stocks like Delhivery, which listed at a premium, have subsequently lost value. The stock has seen a price of Rs306 compared to its IPO price of
Rs 487. Private equity (PE) investors have probably realised that while they may value businesses on the basis of how promising they look, the public markets value them on their ability to make money.
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While PE players may have been able to sell some of their investments either via secondary transactions or an IPO, some part of their portfolios would have lost money. Given the performance of these stocks, it is unlikely the next round of start-up IPOs will be valued as loftily as the last lot has been.
That would have made PEs rethink the valuations at which they are funding companies, which explains the several down-rounds. They would also have realised that in a competitive and challenging regulatory environment, no matter how promising the opportunity, it takes time and money to build a profitable business. Delhivery, for instance, has reported ebitda losses in the last three quarters, and most other NATC companies remain unprofitable. If the larger ones are struggling, smaller players will find the going even harder. The winter is going to be a long and harsh one for the start-up universe.