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India’s startup ecosystem has become the crown jewel of India Inc. From job creation to innovative business model, startups have leveraged technology to solve a myriad of problems in the Indian subcontinent. Many have gone global. Lately, however, there are rumblings. Some startups like Unacademy, Vedantu, Trell, Meesho and a few others have started laying off staff. More than 4,000 people have lost their jobs so far due to these layoffs. As the funding environment is expected to be challenging this year amid economic uncertainty, many startups are optimizing their cost structures by ditching many non-core and new initiatives.

Such subdued sentiment is not limited to India. The United States, home to the largest number of startups, is also witnessing such belt-tightening. Renowned Silicon Valley startup accelerator Y Combinator has warned its portfolio companies of a lack of funding in the coming years. “The safest decision is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare for it is to cut costs and expand your track in the next 30 days. Your goal should be to get defaulted alive,” Y Combinator said in a note to the founders of its portfolio companies.

Such caution indicates that startups need to prepare for the worst, as exuberant growth and valuation seem to have taken a break for the time being. Many experts are of the opinion that startups have had a 13-year bull run so far with investors pouring in billions of dollars. This led to a valuation that exploded. With an expected turnaround, corporate valuations are given a reality check. Share prices of listed startups have corrected by 50-70% over the past two years on most global exchanges. Even large funding rounds are becoming rare. India is now home to 100 unicorns (startups valued at $1 billion or more), but the pace of creation of these unicorns has slowed significantly in recent months.

Difficult times force people and organizations to do some soul-searching. The current valuation craze without a clear path to profitability is not a sustainable model. This is the clear lesson of the current environment. The foundations of any business are rooted in the creation of value. So there is a limit to the extent that startups can sell a product worth $10 to $7 to grab market share. At some point, the basics will catch up. It seems that the current situation is one. So, like any other business, the startup ecosystem will experience severe pain in the years to come. Some will survive and some will not. And that’s the nature of business. But whoever survives this downturn will emerge stronger. Once the groundwork is in place, these startups won’t be chasing investors to raise money, but their internal accruals will support their future growth plans. India is pinning high hopes on its budding entrepreneurs who have shown the world that they can leverage technology to solve many problems facing humanity. They should now make a vow to make the ecosystem sustainable for long-term wealth creation.


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