Are Indian startups prepared for the funding freeze this winter?

Winter is around the corner, and as the temperatures begin falling a little with each passing day, a chill seems to be creeping up on the VC investment front. Investors, who were salivating over a string of me-too startups in the foodtech and hyperlocal segments in the summer, are now questioning the unit economics and profitability of such companies.

So what’s changing, except for the climate, of course? For one, startups that prioritized scale, growth, future projections, and PR, etc. over fundamentals like unit economics, sustainability, and profitability will find themselves face-to-face with cold, hard facts. Building a startup in India may have been about the survival of the richest (and not the fittest) but that may soon be changing.

Foodtech saw a round of frenzied investing in April when it seemed to be the next big thing, and many funds placed parallel bets in the space. The segment, reportedly worth $50 billion is growing at 16-20% annually, and yet, a slowdown seems to be in the works. September saw just two deals getting finalized. There are several reasons to this, including the fact that too much investment in the initial rounds of funding didn’t leave much for follow-up rounds.

“Most of these app-based food businesses gain initial traction in certain pockets of a city, but the same cannot be expected from all parts of the country,” says Sanjay Anandaram, Partner at Seedfund.

Customers in India typically don’t pay an additional amount for delivery and at those price-points, offering a delivery service for restaurants/retailers doesn’t translate into viable unit economics for foodtech and hyperlocal startups.

As winter advances, startups are shifting their focus from growth at any cost (a strong trend in the summer) to the road towards profitability. Of late, Indian startups have overlooked profitability and unit economics over growth and scale,

adds Kashyap Deorah, serial entrepreneur and author of an upcoming book.

Startups who ignored fundamentals to focus on for scale, growth, future projections and frenzied over-hiring are feeling the heat even as a cold front appears to be setting in. Investors are wary of putting in any more money into such companies. In the clear light of day, they have clearly begun to shake off FOMO (fear of missing out).

“Shutdowns, downscaling, and layoffs in the foodtech and hyperlocal segments are only a natural progression. Investors had placed bets on various startups in these segments, and now the time has come to weed out the excess from these segments,” points out Sumanth Raghvendra, who believes that while things might be slowing down, a polar vortex-like cold front is still some time away.

Grocery-focused startup Localbanya and curated foodtech app Dazo appear to be on the verge of shutdown, and reportedly Grofers is acquiring Townrush and Spoonjoy, which are expected to cease their operations in foodtech segment. Paytm-funded Jugnoo too reportedly faced operational challenges, leading the Chandigarh-based company to cease B2C delivery. If media reports are to be believed, Rocket Internet is also looking to sell Foodpanda, which has faced major operational challenges, many of which have been triggered by its own employees.

Last month, Tinyowl reportedly fired 600 employees, while Helpchat let go of over 150 employees in October. Most recently, Zomato cut 10% of its global workforce of 3,000 employees and this close on the heels of the InfoEdge-backed company trying to fill 1,200 positions open at the beginning of the summer.

YourStory, as a rule, doesn’t hazard guesses, but the sudden lack of investor interest in these startups is food for thought. The foodtech segment amassed $74 million in risk capital across seven deals early in the summer, but six months down the line, the game has changed.

“Tons of startups need to cut costs. It's hard but necessary. I hope early movers are applauded for making tough choices, and not criticized,” tweeted Shailendra Singh of Sequoia Capital last week. While Singh is non-committal about whether or not there’s a winter of discontent brewing, he did caution, “I can tell you it sure makes sense to be prepared for it.”

Companies built on strong fundamentals and who are able to strike a good balance between the top-line and the bottom-line will survive. In the next three months, we are quite likely to see me-too startups who chased growth and funding over sustainability to downsize or down shutters altogether. And yet, we at YourStory believe that irrespective of how cold it gets, winter – like summer – remains an amazing time for founders with great products that address real problems.

The story mentioned Ola had raised $225 million (based on media speculation), however the company says it hasn't confirmed any development on such investment. YourStory has removed Ola reference from the story.