India's Startup Scorecard

For the startup ecosystem in India, the scorecard so far has been a mixed bag, observes Akhil Gupta.

Startups are being projected as the 'backbone of future India'.

The Startup Mahakumbh in Delhi is a great step forward in showcasing our startups to the world and the commendable efforts of the Government of India in encouraging and nurturing them.

Potential for startups is undoubtedly looking good. To ensure future success of any venture or industry, it is imperative to have a look at the past, learn from the mistakes and shortcomings, if any, and quickly ensure remedial action.

For the startup ecosystem in India, the scorecard so far has been a mixed bag.

On the one hand, it scores highly as seen in the following:

India had 117,254 startups registered with the department for promotion of industry and internal trade (DPIIT) as on December 31, 2023, according to the ministry of commerce and industry.

This makes India the third largest startup ecosystem globally and the second best in terms of innovation quality, according to Invest India.

Between 2016 and 2023, startups attracted $133.5 billion investment, according to Forbes.

It can be assumed as of today, the total investment in startups will be estimated around $150 billion to $160 billion.

Startups created over 1.24 million direct jobs; indirect job numbers would be significantly higher.

By October 3, 2023, India had 111 unicorns, valuated at $350 billion, backed by around $100 billion investment (of these, six have ceased to be unicorns).

In 2024 so far, two more unicorns added as per DPIIT.

Of these, 13 were listed by February 2024, with a cumulative market capitalisation of $50 billion.

However, startups in India face various problems, which can be categorised under:

Financial performance

Governance issues

Cultural issues

Financial performance

Financial performance of the 13 listed startups, according to data from Firtracker:

In April-December, six companies were profitable, earning a total revenue and net profits of Rs 7,864 crore and Rs 925 crore, respectively.

The highest profit was Rs 435 crore whereas the lowest was Rs 21 crore.

In this period, seven recorded total revenues of Rs 29,976 crore, with a combined net loss of Rs 5,807 crore.

While the highest loss was Rs 1,609 crore, the lowest was Rs 137 crore.

Thus, these 13 listed companies with a market cap of $50 billion had a total revenue of Rs 37,840 crore and an overall loss of Rs 4,882 crore during the nine-month period (annualised loss of over Rs 6,500 crore). 

Among unicorns, the top 10 profitable ones had a cumulative net profit of Rs 6,503 crore (interestingly, of these, two companies with a net profit of Rs 4,843 crore did not raise external capital).

On the other hand, the top 10 loss-making unicorns had a cumulative loss of Rs 33,496 crore in the same period, with the highest at Rs 7,900 crore and the lowest at Rs 2,014 crore.

Thus, overall, the top 20 unicorns had a cumulative net loss of Rs 26,993 crore in the nine months (annualised about Rs 36,000 crore).

Thousands of other startups are burdened with big losses while many are on the brink of extinction due to unavailability of fresh funding to absorb cash burn.

Overall, for a sector with over $150 billion to $160 billion of investments, the current listed and unlisted valuations are estimated around $400 billion to $450 billion, and annual revenues are estimated to be in excess of Rs 3 trillion.

The financial performance is acutely worrisome to say the least. Unfortunately, with no signs that most startups achieving self-sustaining cash flows in near future, let alone the near future, and with funding winter continuing, the looming threat of large-scale shutdowns hangs ominously over India's startup ecosystem.

Governance issues

Several startups, including some very big and celebrated ones, have faced severe scrutiny on governance and compliance issues.

Prominent ones in the news are Byju's, Paytm Payments Bank, BharatPe and Zilingo.

The jury is still out to find out the reasons, but it is visible that a large number of them failed to produce audited or even unaudited results for FY22.

The reasons for poor governance/management can be due to one or a combination of factors like:

Deliberate actions/frauds on the management's part. These could include instances of misappropriation of funds, diversion of funds or adverse related-party transactions. 

Lack of experience of promoters in managing fast scaleups and ignorance of important internal controls, particularly financial controls.

Lack of clarity on revenue and business model.

Cultural issues

The third reason often seen is due to poor culture on part of the promoters.

Sudden availability of large amounts of capital, lack of check on expenditure and cash burn, attainment of celebrity status (often in direct proportion of cash burn achieved) have resulted in many startup promoters becoming too arrogant and unwilling to heed good advice.

Unfortunately, this trait is becoming too common; promoters with humility and openness to advice are becoming far and few.

It is easy to blame startup promoters for the shortcomings, however, in my view; the bigger blame lies with investors.

Usually they show no interest in governing the companies they invest in, but go ahead with fresh funding rounds, sometimes without checking updated financial accounts, or at least audited accounts for the last financial year.

Many new-age investors do not lay much emphasis on discipline, processes and rules of working rather only encourage topline growth.

To achieve that, at times they encourage promoters to even burn cash as quickly as possible.

The system of subsequent rounds of investment at exaggerated valuations prompted by 'liquidity preference' -- where the last investor would get first preference in distribution of proceeds in case of liquidation -- has contributed immensely to bad investor behaviour.

To summarise, I do believe that startups can be our biggest assets in times to come. To achieve that, we will have to ensure the following:

Percentage of startups failing in India within five years dramatically reduces from 90 per cent predicted by an IBM and Oxford study.

No ecosystem with such a failure rate can ever be deemed “successful”. More conservative financing by investors instead of 'casual' spraying of investments.

Ensuring strict discipline, high governance standards with complete transparency must become a collective responsibility of promoters, managers, investors and regulatory bodies like the Institute of Chartered Accountants of India.

A culture where promoters willing look forward to advice/mentorship from seasoned professionals rather than considering them as 'intrusions and interferences'. Investors also need to ensure:

Boards have credible independent directors

Reports and accountability are sought periodically

Resources are provided for responsible governance and analysis of results of investee companies

Companies with poor management and/or governance are not rewarded with repeat funding.

Right to change the management in case of poor performance, deliberate misgovernance and repeated non-compliances.

The ministry of corporate affairs, DPIIT and other government agencies concerned also need to take strict action against startups not providing requisite information and reports within stipulated time.

The government is contemplating some regulation for startups.

Ensure that startups have good revenue and business models, as expected of normal companies.

It's time one of the themes of the Mahakumbh or other such startup gathering told promoters that glory lies not in the ability to burn cash but in creating real profits and sustainable valuations.

Disclaimer: These are Akhil Gupta's personal views.

Feature Presentation: Rajesh Alva/Rediff.com