In the past 12 months, Varun Khaitan and other cofounders of UrbanClap, a local services startup backed by Bessemer Venture, SAIF and Accel, have witnessed a massive clear-out in the sector. Many ventures have been wiped out, failing to scale their businesses and get the attention of increasingly wary investors.
By some estimates, there are under 10 survivors today in the local services market from as many as 300 players at the end of 2015 and the beginning of 2016.
There is caution is the online real estate space too. NoBroker had barely 2,000 customers when it began in March 2014. Today that is over 150,000 and counting, with operations countrywide. Last February, the firm raised $7 million from Korean VC fund KTB Network (its first investment in India) to top up a $10 million tranche it raised a couple of months ago.
“We have built a technology intensive and capital-light business and disrupted the industry,” says Amit Agarwal, CEO, NoBroker. The firm now plans to expand to 20 cities. Costly and unnecessary human intervention has slowed this market and made it ripe for a technology-led disruption.
Agarwal will be wary of companies that have struggled in the market — most notably, SoftBank-backed Housing. com, which went from startup hero to zero in months.
While UrbanClap claims to have grown revenue 13-fold in the past 12 months, it has also kept close tabs on its cash burn. “We have not made outrageous plans to grow just because we have raised some money,” says Khaitan. “We realised that unless it is a technology-driven marketplace, it is a capitalintensive business.”
Having survived the shakeout, UrbanClap now hopes to profit from operating in a much better-defined market, with far fewer opponents looking to undercut them with heavy discount-driven growth plans.
Twiddling the Fingers
The scene in the local services market mirrors the gloom across startups in the country. From the highs of being courted by free-spending risk capital investors for the past couple of years, entrepreneurs are now wondering where their next million dollars will come from.
Investors, in turn, have been wary of making fresh investments due to poor returns from existing investments, with few blockbuster exits.
As the stardust has faded, angst has set in. It is not just funding that has become harder to snare, popular perception of the startup world has dimmed. Job losses have piled up and many people once in thrall of working with startups have retreated to the relative comfort of corporate careers.
If that wasn’t enough, demonetisation policy and the shift towards digital payments have only worsened a bad year. By some estimates, consumer-focused internet ventures led by the likes of Amazon and Flipkart get at least half their payments from cash purchases. With so much money being vacuumed out of the system, these companies faced a bitter end to 2016.
While there is a fair amount of momentum in investing in companies in their infancy (in what is termed seed and angel-stage), the funding pipeline has dramatically narrowed for entrepreneurs looking to close later-stage investments.
Caution: Less Funding Ahead
“This has been a sobering year for all of us,” admits Anand Lunia, cofounder of India Quotient, an early investor in startups. “Bad performers are no longer getting bailed out by their investors.”
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