Future Tense: Why Indian startups are in big trouble

Indian startups have imbibed a lot of talent over the last few years, with Prime Minister Narendra Modi even saying that startups are going to be the backbone of India. However, since the beginning of this year, by estimates, 92 companies in the sector have laid off over 25,000 employees.

As per reports, International Business Machines Corp (IBM) has announced it is considering replacing around 7,800 jobs with AI (artificial intelligence), with IBM Chief Executive Officer Arvind Krishna stating the company will be carrying out a hiring freeze for roles they think can be assigned to AI bots.

Even hospitality service Oyo hotels have reportedly reduced the size of its original public offering to less than half of its original estimate of $1.2 billion.

Rising interest rates causing startups to implode

However, it is not entirely surprising that an industry which is so dependent on cash from investors is imploding in a world of rising interest rates.

As per a report by Bloomberg, the amount of funding for startup sectors fell a whopping 75 per cent in the first quarter of the year, when compared to the same quarter in 2022.

Declining profit margins

A higher rate of inflation has spelled doom for the startup sector with profit margins declining rapidly. Furthermore, inflation has also reduced prospects for consumption growth with the customer being at risk of being hit by higher prices for essentials.

Lessons India can learn from downturn

With so much talent dedicated to the sector, one can only hope that the startup area will not remain in the slumps forever. But there are lessons one can take from this nasty turn of events.

Firstly, startups should remain attractive to global risk capital. If international finance starts looking elsewhere, Indian companies are left in the slump.

Secondly, we should be realistic about the size and capacity of the Indian consumer market. While India may be the largest country, it is not the largest market, as of yet.

Furthermore, only a fraction of India’s 1.4 billion people are consumers akin to the global middle class. And even though Indian fintech firms like to highlight the near-universal reach of new payment platforms, only 6.5 per cent of users on those platforms are responsible for almost half of all transactions.

Finally, many of the best regarded sectors in India, which include IT, pharmaceuticals and automobiles are in danger of being overtaken by technological, financial or regulatory reality, the startup sector may atleast be able to better adapt in such trying circumstances.

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