To understand the big shift from raising money to earning it in India’s stuttering start-up scene, take a visit to the offices of Housing.com in Mumbai.
The online property portal, now headed by entrepreneur Jason Kothari after a public row last year between its founder, Rahul Yadav, and his investors, has shifted to smaller and less flashy premises on the outskirts of India’s financial capital.
Housing.com, part owned by SoftBank, the Japanese telecoms group, is far from alone. Last year, Indian tech entrepreneurs rapidly expanded their businesses, buoyed by record funding deals, much of it from big-ticket funders like SoftBank and Tiger Global, the US-based investment group.Swingeing job cuts are under way. “Housing raised a lot of money, but this year we are focusing on getting a new senior team in place, and getting a more appropriate cost structure,” says Mr Kothari. “One aspect of that is closing peripheral businesses.”
But a new divide is emerging between larger start-ups such as online retailer Flipkart and taxi-hailing app Ola, which are still spending relatively freely, and their thriftier peers.
Mid-size start-ups like Housing.com and restaurant portal Zomato are cutting costs and shedding staff under pressure from worried financiers. Pepper Tap, a delivery business, joined the list this week, shutting operations in half a dozen Indian cities.
Others have been unceremoniously sold off to larger rivals, such as property portal Commonfloor, which was folded into classified site Quikr in a face-saving $200m deal in January brokered by investor Tiger Global.
Some analysts predict that even prominent “unicorns” — private tech companies that are valued at more than $1bn — might stumble.
“There is a shakeout coming in India, just like in America,” says Aswath Damodaran, finance professor at the NYU Stern School of Business and an expert on tech company valuations. “When it starts, the Flipkarts and the Olas says that is because these smaller guys don’t know what they are doing. But then you see this ripple higher. No one is protected.”
India’s funding slowdown became visible in the final quarter of last year, when venture investments sank to $1.5bn, down from $2.8bn over the preceding three months, according KPMG, the professional services firm, and research group CB Insights.
That decline was part of a broader trend, which saw investors from Silicon Valley to Beijing turn cautious on previously fancied start-ups.
In India, the shift is hitting once feted sectors like online property, hotel listings and food delivery.
Investors such as Tiger Global and DST, the venture capital firm run by Yuri Milner, pumped funds into these areas. The start-ups in turn spent that money lavishly to add users. Now, many of those investors want companies to prove they can increase revenues before more cash is put in.
Food delivery has been badly hit. The Indian arm of Foodpanda, the site owned by Germany’s Rocket Internet, was forced to deny last week that its parent was planning to shut it down.
New Delhi-based Zomato, which claimed a valuation above $1bn last year, has been the most prominent casualty. It has reversed a global expansion plan it undertook via a $60m deal for US-based rival Urbanspoon in 2015, closing operations in some smaller Indian cities and cutting 300 jobs.
“Whenever there is no stupid money in the market that is a great time to build your business,” says co-founder Deepinder Goyal. “We are on our way to break even by June if we do well, it might take another three months if we don’t.”
Housing.com is following a similar path, closing divisions such as online home rentals and cutting the workforce to 1,500, close to half of its peak level. Mr Kothari’s budget-cutting efforts were rewarded last month when SoftBank injected Rs1bn ($15m) into the company.
Not everyone is gloomy. Well-managed start-ups are still winning new financing. Many India-focused venture groups raised sizeable new funds themselves last year. “A lot of capital is sitting as dry powder with funds waiting to be spent, so this wait-and-see policy will only be temporary,” says one senior Bangalore-based venture investor.
Still, most industry observers agree that the headiest days of last year’s tech bubble are over — and that India’s start-ups are facing a year of heightened investor pressure to trim fat and improve cash flows.
“A lot of Indian companies are going to have to grow up fast,” says Mr Damodran. “There is a bar mitzvah moment for all these companies, the moment where investors wake up and say ‘You’ve got users, when are you going to start making money?’”