The pessimism in the Indian startup ecosystem is ‘overdone’, just like the optimism earlier, according to a research report by Credit Suisse.

The report has come out on the backdrop of the negative sentiment prevailing in the Indian startup ecosystem owing to the ongoing funding winter bringing several cost cutting measures such as layoffs, shutdowns.

“As a period of euphoria ends, investment flows dry up and valuation benchmarks drop. In this phase, many start questioning the business case. That has started, with investors, entrepreneurs and journalists waking up to a market that is smaller than earlier envisaged, with a stagnant Indian middle-class. In our view, just like the earlier optimism was overdone, so is this pessimism,” the report stated as quoted in The Morning Context.

Credit Suisse also added that the current slowdown in funding indicates a pause for breath after the sprint than a complete halt of funding. With the startup ecosystem seeing 70 unicorns in the past two years, the report noted there is a much needed pause right now.

“With only 11 new entrants, our list this year expands to 103, collectively valued at $357 Bn, vs 93 last year, valued at $330 Bn.” the report mentioned.

Amagi Media Labs, Fractal Analytics, Leadsquared, Molbio Diagnostics, OneCard, Open Financial Technologies, Oxyzo Financial Services, PhysicsWallah, Purplle and ShipRocket – are the new entrants (unicorns) on Credit Suisse’s list.

“This also reflects greater economic salience of Indian unicorns: not just in terms of wealth creation, but also in economic growth,” the report said.

The Ongoing Funding Slowdown

The much discussed funding slowdown began at the start of the last year at the onset of the Russia-Ukraine war. However, the impact of the macroeconomic crisis has been still evident in the startup funding activities.

As we saw, the startup ecosystem could raise only $693.47 Mn across 67 funding deals in February 2023, according to the data compiled by Inc42. The total funding raised last month was down 28.53% month-on-month (MoM) and 81% year-on-year (YoY).

However, growth-stage startup funding surpassed late-stage funding, as the startups in this category raised $381 Mn in 20 deals, while the late-stage startups could only raise $214 Mn in three deals during the month.

According to Inc42’s latest ‘Annual Indian Startup Funding Report 2022’, Indian startups raised $25 Bn in funding in 2022, a decline of 40% from $42 Bn raised in 2021.

Many investors were of the view that 2022 was a much-needed break to bring back sanity in crazy valuations. The funding winter was needed to separate the businesses which were actually seeing growth on the basis of customer capital, rather than surviving on investors’ money. As because in 2022, many startups secured funding even though their business models were not viable.

According to Inc42’s ‘India’s Top 200 Startups Financial Index Report 2023’, as many as 55 (74%) out of the 74 unicorns incurred a cumulative operating loss of $5.9 Bn in FY22.

Even many listed startups such as Zomato and Paytm have also been seen showing low or lack of profitability in recent years.

More Focus On Profitability

Hence, the discussions started that startups should target achieving profitability and increase focus on unit economics to achieve that.

The report also added that private firms, especially those in the late-stage growth, are now under pressure to improve profitability.

“When interest rates are close to zero, it does not make a difference whether a company makes profits this year or the next…When interest rates rise as sharply as they have done, profit expectations need to be brought forward. As firms shift focus to profitability, their growth slows down, which further pressures their valuation. Slower growth also results from startups trying to preserve their capital, as incremental funding has become more difficult,” the report added.