In 2010, booking platform MakeMyTrip became one of the first Indian start-ups valued at more than $1bn. For most of the rest of the decade, a new company would cross the $1bn threshold only once or twice a year.
Then, in the past two years, the rate at which “unicorns” were created took off, with a new company joining the club once every couple of months as investors hungrily bought stakes in Indian technology groups.
Among the unicorns were budget hotel chain Oyo, now valued at about $10bn, food delivery services companies Zomato and Swiggy, each worth a couple of billion, insurance-comparison site PolicyBazaar and eyewear vendor LensKart.
But now, fears are growing that investor exuberance for Indian start-ups and technology groups have gone too far as the market starts to cool, losses mount and the number of funding rounds drop.
The number of monthly rounds fell in the latter part of 2019, said data provider Tracxn. The lowest monthly number for the year was 71 in November compared with 109 in October, a 35 per cent drop. The highest monthly number was 122 in April.
“The fundraising environment has totally changed. There are companies that were chased and sought after, and now it’s getting hard,” said Deepak Shahdadpuri, founder of venture capital group DSG Consumer Partners.
“The emperor is coming out of the bathtub. Who knows if he’s wearing any clothes or not?”
Another prominent venture capitalist said: “Six months back, everyone was jumping to be part of a round . . . In the past two months there’s been a downturn. The days taken to close a round takes longer.”
Part of the reason for the slowing activity has been the sheer scale of investment, particularly in mature start-ups. India is the third-largest recipient of venture capital after the US and China.
Funding for late-stage tech groups soared over the decade by almost 4,000 per cent to $11.5bn in 2019 compared with a jump of 1,000 per cent to $490m for seed funding, said Tracxn.
Other factors causing the drop in activity has been India’s economic slowdown, which has led consumers to pare back spending on sectors such as online shopping and ride-sharing taxis.
The environment was also hit by the dismantling of SoftBank-backed WeWork’s valuation after the US office sharing company launched a prospectus for a failed public offering in August. This prompted scepticism about private valuations.
Since WeWork was forced to shelve its IPO, analysts have zeroed in on SoftBank’s other large property bet — six-year-old Oyo, a hotel chain that plans to become the world’s largest by 2023.
Its financials for the year ending in March showed its losses ballooning almost 600 per cent to $335m, with the company not expecting to turn a profit in its core Indian and Chinese markets until 2022.
“This whole ‘break fast, learn fast, move on’ is OK at a small scale,” another venture capitalist said. “Oyo’s scale is just frantic.”
Other areas of concern centre on India’s mobile payments sector, in which everyone from Google Pay to Walmart-owned PhonePe to Paytm, has invested heavily.
Analysts said it is not clear how these companies will make money, thanks to a public platform that facilitates immediate mobile payments between bank accounts. While it prompted a boom in transactions, it also reduced the barrier to entry for new competitors and made moneymakers like mobile wallets in effect redundant.
However, there are still reasons for optimism in the Indian tech market.
Few countries can hope to offer investors what the country appears to promise. Venture capitalists say they are still excited by India’s long-term potential, given its young 1.4bn population and prospect for years of fast economic growth.
The rate of internet adoption has also taken off since Mukesh Ambani’s telecoms operator Reliance Jio started in 2016, launching cheap 4G contracts that made mobile data affordable to millions.
India is expected to have 850m internet users in 2022, according to PwC, almost doubling from 2017.
This is likely to spur investment and help the overall economy as it encourages mobile-app based services, from grocery delivery to online education.
Deep-pocketed international funds from SoftBank to US based Sequoia and Chinese heavyweight Tencent have invested billions in this sector.
“There are a bunch of moneybags out there who may have missed China, and have absolutely fomo [fear of missing out] about missing India,” said the prominent venture capitalist.
These groups include some of the world’s biggest investors such as Canada Pension Plan Investment Board, which have taken stakes in Indian start-ups.
It means, despite the pain, analysts expect the start-up market to find a better equilibrium as exuberance gives way to more measured investing.
“Some of that froth seems to be settling,” said Vivekanand Subbaraman, an analyst at brokerage Ambit Capital.
Satish Meena, an analyst at Forrester Research, added: “Profit is the keyword in the last three months. Everyone is now talking about profit. Investors are looking to invest based on the business model, and not because of the fear of missing out.”