Indian start-ups at risk as investors close taps, Modi fund falls short

Mumbai: After pumping billions of dollars into Indian Internet start-ups in the last 24 months, global investors are cutting that flood back to a trickle as dreams of huge online sales are clouded by soaring valuations and still-distant profits.

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Even as Prime Minister Narendra Modi lines up a four-year, $1.5 billion government fund to help startups create jobs, entrepreneurs fear that may prove a drop in the ocean. Venture capitalists have already tightened purse strings as ripples from China’s economic slowdown lap around the world.

According to a new report by CB Insights and KPMG, venture capital investments in India’s start-ups nearly halved to $1.5 billion in fourth-quarter 2015 from July-September. Faltering start-ups could mean India missing out on huge potential: Bank of America Merrill Lynch has forecast Indian e-commerce will surge to $220 billion by 2025 from about $11 billion last year.

“While the first phase of funding was about investing in big markets…now investors want to look at how entrepreneurs manage their business and compete while investing,” said Niren Shah, India head of Norwest Venture Partners, said.

Modi’s plan for newly launched companies includes tax breaks on their first three years of profits, as well as their investors.

But most of India’s tech startups make losses, not profits. They follow a discount-driven business model aimed at generating revenue from customers that buy and sell goods and services, touting growth in ‘gross merchandise value’ on their platforms as a metric to attract funding.

Two of the country’s best known e-commerce retailers – Flipkart and Snapdeal – have attracted big-name backers like Accel Partners, Singapore state investor Temasek Holdings and Japan’s SoftBank Group Corp, enthused by growth potential in a country where only 252 million of a population of 1.3 billion people have Internet access.

Yet the pair have notched up huge losses as they compete for increasing sales through deep discounts, according to banking and industry sources. Flipkart and Snapdeal did not immediately respond to Reuters’ emails seeking comment.

“In the last few years, people were looking at gross merchandise value (when considering investment),” said Radhika Aggarwal, co-founder and chief business officer of online marketplace Shopclues.com. “I think that changed very quickly in the second half of last year.”

Shopclues.com raised funds last week from investors including Singapore sovereign wealth fund GIC and Tiger Global that valued the firm at more than $1.1 billion – helped by detailing plans to hit profitability by the first half of next year, Aggarwal said.

In early warning signs for the country’s start-up industry, firms from food delivery companies TinyOwl and Foodpanda to SoftBank-backed property firm Housing.com have either cut jobs or shrunk their services. At TinyOwl, last November around 20 employees even held their boss hostage for two days after it announced job cuts.

“We are in the middle of this funding winter and global issues such as a slowdown in China could likely have a bigger impact this year,” said Vijay Shekhar Sharma, founder of mobile wallet Paytm, backed by Alibaba Group Holding Ltd.

7 Comments

  1. Hey Murudeshwara Rampai,

    It looks like your ‘puli-goddhel’ startup won’t take off to the stratosphere as you’d imagined! My due sympathies. 🙁

  2. As per the latest Bank of International Settlements report, since America started this printing non-existent dollars as a response to the economic crisis, India has received $216 billion as investment dollars. This is leveraged money which is mostly parked in liquid assets such as stock market (BSE) and other RE funds, has to exit India when the US rates go up or there is dollar demand (due to economic problems) in the West. The exodus already appears to have begun as you can clearly see the rout in the stock market and the depreciation of the rupee as a consequence. I have written in the past Indian stock market is a mug’s game. The foreign money manipulates it and the local bakra investors lose out in the end. The RBI in its foreign exchange kitty has about $350 billion to defend the value of the Rupee when the foreign investment leaves our shores. Of course they can’t expend all that which means RBI has to let the Rupee slide when the above $216 billion leaves our shores. Rupee has already touched 68 today. Who knows where it will end.

    Modi-magic any one? By the way I don’t blame Modi or BJP for this mess. This mess was engineered by the previous government.

    To make this worse, back in 2013 when India faced Current Account crisis under the able stewardship of Cambridge-Mohan Singh, Chamcha-Singh Ahluwalia and the Harvard-educated Lungi genius (no, I am not talking about Swami) RBI threw a biscuit to NRIs to borrow leveraged dollars from their resident countries and send it to India through various leveraged-FCNR fixed deposits for attractive rates so the India’s foreign exchanged could be bolstered. Many Middle Eastern greedy bakras have fallen for this. I don’t have the numbers with me but I would assume several billions of such leveraged dollars have entered India. When those FDs mature, the RBI is contractually obliged to return those dollars. This will only cause our foreign exchange to deplete and the Rupee to collapse. The current low oil prices is the only thing holding the dam from bursting.

    When this shit hits the fan in the next 2-3 years, in the absence of new foreign investment dollars and potentially diminishing overseas remittance (mainly from the gulf region when already millions are poised to lose their jobs due to low oil prices), Rupee credibility is going to suffer severely. Don’t be surprised if Rupee collapses to 100-120 to the dollar at that stage. It does not matter whether it’s Modi in power or anyone else. India needs foreign money for survival. We don not have anything of our own which can sustain our economy. Most of the jobs are donkey-labour serving the West.

    An interesting question at that time to ask is who in India is going to suffer the most?

    -Exporters are going to have a fields day as weak rupee is going to make their products competitive. IT mainly if there is still outsourcing left in the West. It’s anyone’s guess how long can the West hold together.

    -The importers are going to suffer big time. Holidays, higher eduction abroad etc.

    -With gold and petrol, which are the main 2 imports being, at low prices I do not believe it is going to have massive inflationary concerns in India so RBI does not have to worry about inflation or interest rates in the immediate future.

    -With no major inflationary impact, the domestic savings/FD account holders may not lose as much in real terms. Perhaps buying a little gold and silver is a good bet for them in this uncertain climate.

    -The domestic companies which have borrowed in dollars from overseas (there are plenty of them apparently) are most likely to go bankrupt as, with powerful dollar/weak rupee, they will never be able to service their dollar debt so will have to force into liquidation. This includes the start-ups which are mentioned in this article.

    -If Dollar goes as high as I have hypothesised, the NRIs who kept all their money in Rupee will find that they had lost a golden opportunity to make massive gains due to the dollar play. If they had converted into dollars they would have had manna falling from the skies. Again, who know how far the Rupee slides?

    – if you have borrowed in the Middle east you are in big trouble. All GCC currencies are pegged to the Dollar. As dollar goes up so do the GCC currencies which means anyone who has borrowed there will find it extremely difficult to pay back. More over GCC economies are deflating which means businesses will be under immense pressure to generate revenue. If you don’t pay back the debt, then enter-sharia…. biriyani in prison. If war breaks out in that region and you have debt, you can’t leave. Also most of the middle eastern expatriates who fell for RBI’s biscuit above have found that their deal is no longer worthwhile when Rupee has collapsed. Many have already lose money on the deal as most struck it when rupee was at 62.

    If India has to grow on its own then there has to be retail boom like what we saw in the West in the last 50 years which means government has to allow 100% FDI in retail. But that’s a poisoned chalice for Modi. All the religious affiliation of the supporter-base aside, most of the BJP votes are from middle class trader/baniya class. The moment retail FDI comes, this trader class will lose their livelihood and BJP will be history.

    More, will write when I find time.

  3. Dear readers,

    Regardless of all the domestic issues such as corruption, poverty, unemployment that we have have never managed to overcome.

    But this government, like a middle class household hoping to solve all woes with one stroke, has decided to buy as many lottery tickets as possible. Be it “Make in India”, “Digital India”, or now “Start Up India”.

    An obvious factor is that a start up on most occasions is way too difficult to sustain. Let’s face it, start ups are never a cake walk and most of them are bound to fail. Some startups stand out from others purely because they are brilliant ideas. And not all ideas are brilliant. The good ones successfully draw the attention of investors and grow big.

    Critics have pointed out that the funds for the start-up plan will come from the taxpayers’ money invested in venture-capital fund.

    And most economists agree that this is not a smart move. They say venture-capital funds are high risk investments and the government does not need to risk public money on it.

    The Start-Up India project has little promise for the youth living in India’s small towns.

    For 13 successive months, India’s exports have contracted, according to official data published by the ministry of commerce. Exports shrank 14.8 per cent in December 2015, compared to a year ago, as demand for India-made products from European Union, West Asia, China and even the US shrank. In the nine months from April to December 2015 period, exports contracted 18.1 per cent.

    The drop in the oil prices was both a blessing and a curse for India. It slashed India’s import bill by more than 40 per cent, which is a welcome development. But petroleum products are India’s largest item of export and the collapse of oil prices has pared export earnings from petroleum products by 50 per cent. That is a big blow for the country and the biggest reason for the contraction of export earnings.

    Petroleum products are being exported to countries as diverse as the US, United Arab Emirates, Brazil, South Africa, Japan, South Korea, Netherlands and Singapore. Petroleum products account for more than half of India’s exports to Brazil. While oil prices have collapsed, so have India’s exports to that nation.

    Like petroleum, the collapse of gold prices has had similar impact on India’s global trade. Though it has brought down import bill for gold, it has also hurt export earnings. More recently, the fall in gold prices has also led to increased demand for the precious metal in the country. Besides gold and other precious metals, pearls and precious stones are among the top exports from the country. Export of gold and precious metal jewelleries contracted 33 per cent between April and November 2015, according to disaggregated data of the commerce ministry. Exports to United Arab Emirates declined by a whopping 45 per cent.

    Modi’s government which runs on ‘AAA'[Ambani,Adani and Advani] batteries hand never realised the actual problem facing the countries.The great economist like Shourie and Sinha has already gone underground realising the free fall of Indian economy. Other than Modi’s Twitter account, statistics of Indian economy looks like as if it is taking plunge from highrise.Instead of saving the struggling companies Modi’s government know wanted to ‘startup’ like ‘Hamara Bajaj’ lean to the side for every kickstart.

    The policies of the Indian political and economic elite and their companies are made for a disaster. But are the elite prepared to listen? Unlikely. They are too busy making unachievable and profoundly elitist policies. They are the ruling classes.

    Jai Hind

    • shAIKh moHD rizwan – the lottery tickets investments by Modi, “Be it “Make in India”, “Digital India”, or now “Start Up India”.”

      Please explain why rupee is at lowest in spite of crude being at its lowest of 30 dollars per barrel from 106 dollars per barrel, when UPA was in power. Why the price of petrol and diesel decreased by 10% when the crude decreased by 75%.

      We are saving 20% of our total foreign currency earnings on crude bill alone, and yet, rupee is at it abysmal best!

      Janaab, would you please consult the Shreemaan Sanatana Economist, Original Duplicate, and enlighten me ? For, the duplicate never reply my questions and talks about international terrorism to justify RSS terrorism. He claims RSS is peaceful organization, yet forgets it has given birth to 101 terrorist organizations Like Sanathana Organization, the Durga Vahini, the Mhlechanaashini, the Jagath Nashini, the Rakshasa Poshini, Dhoortha Paalini, etc, etc.

  4. Have you noticed that the RSS/BJP is opposed to the use of English, claim English education is unpatriotic and want to chase away English from India but when they want foreigners’ money they don’t think twice about giving English names for their initiatives- Startup India, Digital India, Make in India- otherwise it is Swacch Bharat, Unnat Bharat Abhiyan, etc

  5. Dear friend, the last two paragraphs are applicable not only in India but around the world. In 2011, the topnotch Economists from the London school of Economics met the Queen of England, and apologized that they didn’t know about this recession coming. The U.S. Economists were telling from 2008 to 2010 repeatedly about a V turn economic recovery, now they are in a long rest. How a recovery can take place while the richest country lost 2 trillion dollars in the stocks in 2015 and in the month of January 2016. The Chinese economy is slowing down. Their massive investment in high rise apartments- long range railways-fancy shopping centers with the anticipation of stimulating the economy through domestic consumption has been turned as a total blunder. The Japanese economy is in a prolonged recession.

    The commodity price plunging, especially that of oil will be pushsing down many of the prosperous countries into tight budgeting and austerity measures; and its aftermath would be identical to the Eurozone’s austerity medication. Venezeula-Saudi Arabia-Russia-Nigeria-Iraq are faced with serious financial challenges, in some of the countries salaries are not paid to the employees, stores are empty without food.

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