2022: A tumultuous year for startups

Startups in India had a 'wake-up' year in 2022. After a pandemic-induced boost in 2021, this year was a period when the Indian startup ecosystem was roiled by layoffs, funding crunch and slowdown in demand among others. In the first quarter of 2022, the momentum was quite intact with the country producing 13 additional unicorns. Unicorns are those startups with a valuation of $1 billion or more.

The year also saw India entering the 100 unicorns club. It became the third largest startup ecosystem in the world. However, the situation dramatically changed with the Russia-Ukraine war. As the US Federal Reserve and European central banks started raising interest rates, the funding environment turned ugly. In 2021, Indian companies raised $42 billion in 1,583 transactions, creating 42 unicorns in the process. With funding momentum, the country had 86 unicorn companies by the end of 2021. However, the funding tap dried up after the first quarter of 2022.

According to global consultancy firm PwC, the startup funding in India in Q3 CY22 (July-September) touched a two-year low at $2.7 billion across 205 deals. Though data is awaited for the whole year, 2022 is likely to be one of the lowest funding years in the recent past. As a result of the funding crunch, startups started tightening the belt with several cost optimisation measures. This year saw one of the largest layoffs in the Indian startup ecosystem. More than 18,000 employees lost their jobs with around 52 startups cutting down headcount. Among the companies, which laid off their staffers, were many unicorns and soonicorns. Amid these layoffs, hiring momentum also halted. And there is no certainty that the spree of layoffs has bottomed out this year.

Amid such a gloomy environment, there are many lessons for the Indian startup ecosystem. First, the startups have now realised that chasing revenue growth at any cost is a bad business proposition. The old world business principle of profitability has regained its importance in the startup world. That is the reason that many startups cut costs by downsizing the employee count apart from taking other such measures. Secondly, the funding crunch has given an awakening call. Now, new-age companies realise that they have to grow from internal accruals not through funding from outside sources. While equity infusion from funding agencies will remain a key source, startups have to be prudent in their end use. Similarly, these companies have come to terms with the fact that they can't do hiring without solid demand estimates. The startup world has received a bad press in 2022 owing to rampant layoffs. They are expected to be prudent in their manpower planning in coming years.

As we approach a new year, Indian startups are likely to emerge stronger next year with these key learnings. It is a known fact these companies have emerged as the largest job creators in India. Therefore, a healthy and sustainable growth is very much required for the Indian economy. While new age companies are known for their technology-led innovative solutions, they need to be more prudent about their finances. If startups implement the learnings from 2022 in right earnest, the next year will see a very different narrative in growth, profitability and hiring terms.