The missive, which has been seen by ET, warned founders to tighten their belts, as the Indian economy continues to contract with consumers in Asia’s third-largest economy reducing their spending.
“Consumer sentiment is weak. We are seeing this in the sales data from our portfolio, from conversations we are having with CEOs and feedback from distributors and retailers,” wrote Shahdadpuri, one of the most active early-stage investors in India.
The statements echo those of 2016 and 2017, which saw a prolonged funding slowdown in India’s startup ecosystem, with large swathes of investors holding back on closing deals, while urging their portfolio companies to look for paths to profitability.
That period also saw the likes of Tiger Global Management, the New York-based investment firm, walk away for almost three years, before making a return late last year.
Shahdadpuri’s mail to his portfolio founders comes on the back of India’s economic growth hitting a six-year low of 5% in the first quarter of the current fiscal year. It has been estimated to slip even further, driven down by a synchronised macroeconomic slowdown across the globe. The Singapore-based fund manager, who was also an early investor in hospitality chain Oyo, pointed out that risk appetite among venture capital funds had decreased. “This is a sharp contrast to the market sentiment only six months ago. In the last three weeks, we have seen five different fundraising rounds or M&A discussions collapse post term sheet and pre-closing. In some cases, this led to job cuts and deep cost rationalisations,” he wrote.
Shahdadpuri did not respond to messages and an email sent by ET seeking comment.
Indian fund managers echoed sentiments broadly similar to those of Shahdadpuri. “We are in a bit of a let’s-take-a-breath situation, let’s assess everything, but make sure that things are in order,” Sandeep Murthy, a partner at Lightbox, said.
In an interview with ET earlier last week, Promod Haque, the senior managing director at Silicon Valley-based Norwest Venture Partners, told ET that valuations of technology companies were likely to correct next year. While DSG’s warning is among the first such official communication being dispatched to entrepreneurs by a prominent VC, others are warning of an overreaction. “There is acknowledgment that a lot of traditional things are shifting… There has been a broader shift and sentiment change. We’re telling everyone to be mindful, not to expect ridiculous valuations, and that the situation’s going to be a bit more tempered now. But we’re not going to make radical changes, because our philosophies have always been in line,” Lightbox’s Murthy said.
DSG’s email is primarily about consumer product companies. Industry insiders are, however, warning that sectors such as fintech are also likely to feel the pinch.
“The IL&FS debacle has cast a shadow over the entire NBFC space so lending startups will be affected,” said a Mumbai-based early-stage investor who asked not to be identified. “Now add to that the slowdown and unemployment. All of it makes for very bad reading.”
He said these had now become a heady cocktail, which would slow down rounds for early- and growth-stage companies. Recently, Karvy Stock Broking was banned by the market regulator and “that means those startups in the wealth management space will also be looked at very carefully,” he added.
Apart from these factors, the fact that all three non-state telecom companies are going to raise call and data rates from December means that disposable income will drop. “This will affect content and direct-to-consumer companies,” he added.
It’s not just the startups that are being asked to pull up their socks. Scrutiny of global investors has also increased in the wake of WeWork’s meltdown, along with the underwhelming market debuts of Lyft and Uber, resulting in serious questions being asked about their judgement as well as governance. “The whole thing begins from the quality of governance in the funds themselves. When we talk about governance issues in companies, you have to look at governance within the funds themselves,” Orios Venture Partners managing partner Rehan Yar Khan said.
While a number of India’s top startups, including Oyo, Ola, Paytm and Zomato, continue to command multibillion-dollar valuations, there are fears that deep-pocketed, but overly optimistic, investors, led by the likes of SoftBank, have not benchmarked the companies to tangible metrics.
