Ishan Bakshi writes: Market reality is catching up to the tech startup ecosystem

The cycle, however long it takes, eventually turns. And turned, in India. A startup ecosystem that has been in a state of hyperactivity over the past few years — driven by a combination of factors but, in large part, by the age of cheap money — is now showing signs of weakening. With this juncture comes the realization that many of the assumptions on which stratospheric assessments are based are not divorced from reality.

It was hard not to get caught up in the allure and promise of the new age tech companies. Built on a compelling narrative – a combination of accelerated financial inclusion (bank accounts), ease of identification (Aadhaar) and connectivity (mobile phones) – it’s ultimately a bet on the Indian consumer, and the economy, not government regulations/politics. In the age of cheap money and negative real interest rates, uncomfortable questions about true market size and profitability have floated under the rug. High cash burn rates were the norm as both startups and investors sought growth through customer support.

But profitability is not just a vague concept belonging to another century. Among the startups that went public recently, Paytm lost Rs 2,396 crore in 2021-22 while Zomato and PB Fintech (PolicyBazaar) lost Rs 1,222 crore and Rs 832 crore respectively. The seemingly inexhaustible source of cash that finances such losses is now under pressure. Certainly, investors will continue to pump money. Some start-up companies will continue to be funded at a young age, as will some more mature companies. But investors are likely to be more cautious in their dealings. And that would include the entire spectrum — from early-stage venture capitalists to institutional and retail investors — who have all made a profit, but also burned their fingers.

Recently, Alibaba and Ant Financial exited their entire holdings in Paytm Mall for Rs 42 crore, valuing the project at just Rs 100 crore – a far cry from the $3 billion valuation attributed to the company in its latest fundraising round. There are also reports of startups in diverse markets, ranging from Ola to OYO, planning to raise funds with lower valuations. Among those that have gone public recently, most are trading at a much lower price than their listing price.

During the busy days, many numbers and indicators of market volume or TAM (Total Addressable Market) were collected. One such figure that has been brought up is the country’s smartphone users – some have linked this to 500 million. Or the transactions routed through the UPI platform – in May there were nearly six billion transactions worth 10 trillion rupees. or quasi-global bank accounts. But in reality, for most of these startups, the market or even the potential market is just a fraction of this. Whichever way you slice the data, the reality is that there aren’t many consumers with as much discretionary spending power, and those who do aren’t increasing their spending as these companies hope. This appears to be the case across startups for a range of products/services.

Take Zomato for example. From 2021 to 2222, 535 million food delivery orders were placed on the platform. Given that the company has 50 million consumers transacting annually, this translates to just under 11 orders per customer for the entire year or less than one order per customer per month. Of those 50 million customers, 15 million did it at least once a month, while 1.8 million did it once a week. In the case of Nykaa, the average number of unique visitors per month ranges from about 16 million for the fashion sector to 21 million for beauty and personal care products. However, the number of transacting customers is only 1.8 million and 8.4 million respectively. Similarly, while Policy Bazaar has about 59 million registered customers, only 11.8 million are unique purchase customers.

Equally worrisome is the complete absence of any increase in spending by those consumers who will have the ability to spend more. In 2020-21, the average order value of Zomato was 397. In 2021-22, it was Rs 398. In the case of Nykaa, the average order value in the beauty and personal care sector was 1,732 rupees during January-March 2022 – the lowest level in the past eight quarters. In the fashion category, it was roughly flat compared to the same period last year. In the case of PolicyBazaar, the situation is no different.

While more consumers are using digital payment platforms – Paytm has about 70 million users transacting per month – these numbers suggest that when it comes to consumers with high discretionary spending, the market size is shrinking dramatically. While these companies have seen an increase in the number of clients transacting, the extent to which the total client base of these start-ups can expand further is due to the number of households in the group with significant spending power. And if sales of small cars are not increasing, a sign of increased discretionary spending, a sign of rising ranks into the middle class – sales of small and compact parts from Maruti Suzuki, which account for nearly two-thirds of domestic sales of automakers, which actually contracted in the period from 2021 to 22 – This is perhaps the clearest indication that the market is not expanding. The overall reality is catching up.

Tighter financial conditions, and a re-branding of the market, will affect fundraising efforts and valuations. Several questions arise. How long will investors continue to support consumers? Will startups still get the same ratings they received in previous fundraising rounds? Or will we see rounds down? Some startups will survive this period. Many may not. Changes in the dynamics of private markets will also have an impact on public markets.

Interestingly, even as questions are asked about the prospects for start-ups, consumers and the economy, it seems that ratings of some companies in sectors that are more closely regulated, and more directly influenced by government policies, defy gravity. For some of these companies, the price-to-earnings ratio is higher than the astronomical price-to-rent ratios for residential properties in Delhi.

This column first appeared in the print edition on June 28, 2022 under the headline “On Startup, Gravity Check”. Write to the author at

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