Coming off a tough 2023, which saw a large number of start-ups having to bring down shutters, the environment has perked up for start-ups and their investors with fewer shutdowns, as funding has become more cautious and business models more rational. The prolonged funding winter forced start-ups to reassess their strategies, focusing on sustainable growth and profitability.
Last year saw 24 start-ups shutting down compared to 1,702 companies in 2023, according to data provided by Tracxn. Over the last couple of years, the sector that has seen the most shutdowns is consumer tech, followed by enterprise applications, retail, edtech and healthtech, the data showed.
Some of the prominent start-ups that have bit the dust are business and financial content platform Stoa, edtech platform BlueLearn, Saas-based software suite for jewellery stores Gold Setu, online tax filing platform Makemyreturn.com and microblogging platform Koo, that was supposed to be an alternative to X.
Many of these ventures, founded during the years 2020-2021, closed down despite receiving several rounds of funding worth several millions of dollars, and backed by well-known investors such as Tiger Global, Broom Ventures, Accel and Anthill Ventures.
Funding boom
The funding boom of 2020-2021 that saw a mushrooming of start-ups with unsustainable business models, was followed by the funding winter which forced start-ups to reassess their strategies focusing on sustainable growth and profitability, said Nidhi Killawala, Partner at law firm Khaitan & Co.
“The funding winter is a reality check that brought back the focus on fundamentals like unit economics and profitability for start-ups. Also, investors became more cautious following high-profile start-up failures, which faced significant financial and legal challenges. This caution led to more thorough due diligence processes,” she said.
There are longer lead times to deal with closures, more focus on diligence scope, methodology as well as focus on corporate governance, she added.
During Covid, investors with too much liquidity were chasing entrepreneurs with start-up ideas. “Also companies benefited from the whole idea that tech can pretty much do everything because manufacturing had stopped,” said Gautam Singh, Partner, Corporate Practice at Trilegal.
The sanity in the star-up ecosystem was brought about partly by the funding frenzy being choked off and partly “because people started enforcing maturity on the start-up ecosystem,” said Singh. He pointed out that valuation have corrected to a significant extent and consolidation has emerged out of the failed start-ups, as well as better business models and efficiency.
Both Singh and Killawala explained that during the funding surge it was the tech and tech-enabled companies that attracted most investments and “therefore, it is unsurprising that many shutdowns are occurring within the same sector that received the highest funding,” Killawala added.
Over the past couple of years, promoter behaviour has also changed drastically along with the evolution in the investor mindset.
“There is a lot of dry powder, there’s a lot of interest in India, but nobody is writing blank cheques anymore,” said Singh.