Zombie unicorns: Startups go from feast to famine
MUMBAI: The valuation of Meesho, the Indian e-commerce rival of retail giant Amazon, more than doubled last year to $5 billion, after marquee investors such as SoftBank and Fidelity pumped in hundreds of millions of dollars.
The investors aimed to ride a boom in India’s tech startups, which raised a record $35 billion in new funds in 2021. However, the tide has since turned, as corporate governance concerns loom large for investors facing a new uncertainty in global markets.
“We haven’t seen a slowdown like this in at least five to six years. It is going to be brutal,” said Anand Lunia of venture capital firm India Quotient, an investor in more than 70 startups since 2012. “I expect to see a lot of zombie unicorns. Companies which became unicorns but have no business models have stopped hiring. They are not dying, but will become irrelevant,” Lunia said.
Now Meesho is trying to raise debt and cut expenses after efforts to raise fresh funds of $1 billion floundered, making investors wary of its monthly cash burn of $45 million and stiff competition, two people familiar with the talks said.
Meesho did not respond to a request for comment.
Its struggles are among the first signs of a painful future awaiting many Indian startups.
Plummeting Indian tech stocks are a worry, but investors spooked by fears over corporate governance are stepping up scrutiny during due diligence efforts, which delays funding rounds, two venture capital executives said.
There are also concerns that valuations in India are already too high, even when startups’ business models are being led by discounts and there is a bleak outlook for revenue, they said.
That could slam the brakes on the unprecedented growth and dull the lure of Indian startups.
Eight venture capital and startup executives said fears were growing that a funding crunch would lower valuations, leaving less cash to achieve growth.
Lunia said he had told companies in which his firm has invested to ensure they hold liquid cash sufficient for at least 18 months, reduce spending and headcount, if necessary.
Just last week, BharatPe, an Indian payments startup backed by Sequoia Capital, said it would overhaul governance practices following an internal review.
Another startup Vedantu, which offers online tutoring courses and is backed by Tiger Global with a valuation of $1 billion, laid off 200 staff this month in a “load rebalancing” move it said was based on growth expectations.
Typically, Tiger has targeted bigger Indian startups, but it has now told bankers it will only consider deals involving those with a valuation of less than $200 million, in a bid to reduce risk, said two executives with direct knowledge of the matter.