Homegrown microblogging platform Koo shut down last week, becoming the latest addition to the startup “deadpool,” but the number of startups shuttering has fallen a massive 99.8 percent this year, a trend exacerbated by the so-called funding winter.
Investors say the wave of startup bankruptcies over the past few years is a “necessary cleanup” and founders are now focused on improving their financial metrics. But the startup industry isn’t out of the woods yet, as “zombie” startups have emerged as a new threat.
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“Founders need to ensure that their business model works from day one. A company like Koo which operates on a copycat model without any attempt at differentiation will not survive in a market like India. The market is ruthless and poor ideas will be wiped out,” said a prominent investor on condition of anonymity.
Besides Koo, other startups that have entered the deadpool in the past few years include Niki, Zipgo, Crejo.Fun, FrontRow, and GramFactory.
The decline of Deadpool
As many as 5,868 startups have closed due to macroeconomic headwinds in 2021. With improving macroeconomic conditions, this figure is set to fall to 1,720 in 2023 and just four so far in 2024, according to data from market intelligence platform Tracxn.
“Over the past year, we have seen a lot of companies start increasing gross margins at the expense of revenue growth. Multiples are also there. Multiples are shifting from revenue to gross margins. The prospect of a good IPO performance is also pulling founders towards profitability,” said Vikram Chakra, founding partner at 8i Ventures, a fintech-focused venture capital firm.
In parallel, startup funding is also on the rise: Although funding in the first half of 2024 (H1) fell 13% year-over-year, startups are expected to raise $4.1 billion in H1 2024, up 4% from $3.96 billion in H2 2023, after four consecutive quarters of declining funding since 2022, according to Tracxn.
Moreover, the number of layoffs at startups fell 62 percent to 3,600 in the first five months of this year (January to June) from 9,596 in the same period last year, Business Standard reported earlier.
While the numbers certainly paint a rosy picture, the country’s startups may not be out of the woods just yet.
Cash Burning Zombies
Founders are becoming more cautious now, but some companies are continuing to burn through cash to survive and could quickly fall into the deadpool once their financing runs out.
“There are several companies that raised large amounts of capital at inflated valuations a few years ago when it was easier to raise capital, but they don’t have the right business model. They have enough capital to survive for a few years. Many more may go out of business when they run out of cash,” the investor said, speaking on condition of anonymity.
Called “zombie” startups, these companies are technically functional but have lost their vitality.
“These companies keep their doors open just enough to avoid being written off by investors, and contribute to the total number of ‘active’ startups despite not having any real growth or impact,” says Anirudh A. Damani, managing partner at micro venture capital fund Alta Venture Fund.
It is also important to note that the funding freeze over the past 12-18 months has cooled the market, resulting in fewer startups being launched and fewer closures.
Damani added that the downward trend in closures is “cyclical” and that more startups could close in the future.
“This is the natural ebb and flow of the entrepreneurial ecosystem. The current decline in closures may signal the start of a new bull market, but we expect closures to rise again as the cycle matures and peaks,” he said.
While the numbers look better, investors continue to operate with cautious optimism and focus on companies that demonstrate sustainable growth rather than “short-term profits.”
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