After a challenging 2023 that saw numerous start-ups shutting down, the climate for start-ups and investors is showing signs of improvement, with a decrease in closures. Funding has become more cautious, and business models are being approached with greater rationality. The prolonged period of limited funding has compelled start-ups to rethink their strategies, with an emphasis on sustainable growth and profitability.
In the previous year, 24 start-ups ceased operations, a stark contrast to the 1,702 companies that shut down in 2023, as per data from Tracxn. The consumer tech sector has experienced the highest number of closures in recent years, followed by enterprise applications, retail, edtech, and healthtech.
Notable start-ups that have unfortunately closed their doors include the business and financial content platform Stoa, the edtech platform BlueLearn, the SaaS-based software suite for jewelry stores Gold Setu, the online tax filing service Makemyreturn.com, and the microblogging platform Koo, which aimed to provide an alternative to X.
Many of these businesses, established during the boom years of 2020-2021, shut down despite having secured significant funding from reputable investors such as Tiger Global, Broom Ventures, Accel, and Anthill Ventures.
The funding surge of 2020-2021 gave rise to many start-ups with unviable business models, which was followed by a funding slowdown that forced companies to prioritize sustainable growth and profitability, according to Nidhi Killawala, a Partner at Khaitan & Co.
Killawala noted, “The funding slowdown has served as a reality check, refocusing attention on essential aspects like unit economics and profitability for start-ups. Investors have also become more cautious in the wake of high-profile start-up failures that faced significant financial and legal difficulties, leading to more comprehensive due diligence processes.”
She added that there are now extended lead times for resolving closures and an increased emphasis on diligence scope, methodology, and corporate governance.
During the COVID-19 pandemic, investors with excess liquidity were eager to engage with entrepreneurs and their start-up concepts. “Moreover, companies were buoyed by the belief that technology could essentially solve all problems during a time when manufacturing had slowed,” explained Gautam Singh, Partner in the Corporate Practice at Trilegal.
Singh commented that the recent adjustments in the start-up ecosystem stem from a reduction in funding frenzy and “a growing demand for maturity within the start-up arena.” He noted that valuations have corrected significantly, leading to consolidation amid failed ventures, as well as improved business models and efficiency.
Both Singh and Killawala highlighted that in the midst of the funding boom, tech and tech-enabled companies attracted most of the investments, which explains why many of the closures are concentrated within that sector.
Promoter behavior and investor mindsets have transitioned considerably in recent years. “There remains substantial capital available and keen interest in India, but the days of writing blank checks are over,” Singh stated.
