That the covid pandemic’s easy money would fuel a global flare-up in cash burn by technology startups was clear from its onset. In India, the size of this inferno more than doubled in 2021-22, according to a VCCircle study, with our top 50 tech startups having burnt a whopping ₹30,304 crore, up from ₹14,386 crore the year before. ‘Cash burn’ refers to investor money spent in a market, typically as part of a loss-leader strategy to acquire a large user base that’s expected to yield profits later, and VCCircle took operating losses as a proxy for cash burn. The data for 2021-22 is staggering even in a sector where a splurge on user engagement is the done thing—a high-risk, high-return bet on being able to monetize it someday. Swiggy, with a monthly burn rate of ₹270 crore, led the pack of cash guzzlers. It was followed by ShareChat’s ₹240 crore, which placed it in a club with Hike, Vedantu, Spinny, Unacademy, Cred and others that spent more than twice what they generated in revenue. And then there were firms like BigBasket, CureFit and a clutch of others that kept their burn rate at a sharper incline than revenue growth during that year. All this incineration was enabled by the access that venture capitalists got to credit for the asking once interest rates were driven to zero or less in real terms by central banks moving their policy knobs in response to covid.
The resilience of startups with loss-leader strategies is now being tested as monetary conditions have been reversing for more than a year, forcing a swing back from unbridled expansion to combustion control. Interest rates have risen just about everywhere, while venture capital flows have slowed, startup valuations have dropped and rough times after a heady season of excess have delivered painful rounds of cost snips and layoffs. Although new businesses pride themselves in the agility of their decisions, half-hearted responses are understandable. For some, this is their first such squeeze and encounter with uncertainty. And while some tech platforms appear to have used the bounteous phase of venture funding to scale up and secure key objectives—such as bulking up a database beyond the least needed for it to be valuable or reaching a critical mass—others seem disrupted by last year’s downshift in the cash-burn rates they can afford. In winner-takes-all fields, players face the pressure of pressing ahead or risking a loss of what has already been ploughed in. For many newer market entrants, an effort to monetize a user base gained recently by guzzling cash might well have been premature, so a reduction in publicity expenses and freebies for users was a logical response.
The past year has been unkind to startups. We may even be headed for a shake-up in India’s startup space. It is improbable that all business ideas that were funded are worthy of survival and the recent reversal of easy money could separate digital winners from also-rans. This is not just a race to gain operational efficiency that stretches the rupee and burns less cash. Startups that had hedged their game by the likelihood of a monetary switch have an advantage over those in a sweat adapting to what should always have been taken as actual normalcy—money that’s not freely available. To be sure, fortunes in this space are supposed to be driven primarily by the potential of business ideas and how well they’re put into play. It’s a sign of our over-financialized times that decisions taken by central banks matter so much.
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