Why 2016 has not been too great for Indian start-ups

Indian startups seem to be going through a rough patch. Unlike two years ago, when startups were flush with funds, the investors in 2016 have grown wary about startups and their sky-high valuations.

Last year, Zomato and Foodpanda laid off 300 employees each to cut down on rising costs. In August, AskMe decided to shut shop after its single largest investor pulled the plug on funding. Here are some of the reasons that have turned 2016 a nightmare for Indian startups.

Bad News from Silicon Valley

While there was still euphoria in the Indian start-ups landscape in 2015, worrying signals surfaced from the Silicon Valley. Analysts questioned the business models of poster-boys such as Twitter and online file sharing company Box. The values of some unicorns got marked down. Worse, the public markets discounted the valuations private tech companies commanded.

Payments company Square, for instance, was valued at $6 billion in 2015 in private financing. The value halved when it went public in November. Other tech stocks tanked - Chinese e-commerce gorilla Alibaba, Box, dating company Match, and wearables firm Fitbit are all trading below their IPO price.  This sentiment has made its way to India as well.

One Sector One Startup

Each sector ended up supporting just one winner - that's the nature of the Internet markets where the winner takes all. That party - of lofty valuations, of raising fast money, of chasing reckless growth at any cost - started winding. In the grocery vertical, over the past three to four years, about 60 multi-city start-ups and six prominent ones that included BigBasket, Grofers and PepperTap, mushroomed.

In fashion, there were at least 10 established names, including Myntra, Jabong, Yepme and Limeroad. Similarly, there are five prominent players now in the Indian furniture e-tailing category: Pepperfry, Urban Ladder, FabFurnish, Homelane, and Livspace.

The Greater Fool Theory

Even when the losses were mounting in startups, the VCs played along, presenting more money and gifting higher valuations. Mahesh Murthy, Managing Partner of Seedfund, an early-stage venture firm, felt the forces driving investments and valuations in e-commerce and food-tech was the Greater Fool Theory, or in his words, the "Topi" theory - the idea that investors can get into a company, pump it up, and dump it onto somebody else's head.

Future Funding

Some well-capitalised investors refuse to participate in the future rounds of their portfolio companies, or are exiting. Helion Ventures, an investor in Flipkart, sold its stake a year ago. Accel India, one of Flipkart's earliest investors, reportedly sold part of its stake during the last financing round of $700 million in July 2015.

Open Market

The belief that Indian companies will be market leaders in India, much like Alibaba or Didi Kuaidi in China, is an unrealistic aspiration . China speaks only Chinese but metro consumers in India speak English. That, combined with an open market, has left the door ajar for multinationals to spoil the Indian party. The expectation that Flipkart will be the Amazon of India and Ola the Uber of India appears to be crashing.

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