Startup Shutdowns Are Here. Is There a Way Out? Since last month, many startups including Friyey, FrontRow have shut shop

Since the beginning of funding winter, experts predicted that we would see many startups across the globe shutting down. Today, after months of funding crunch, the nightmare seems to have become a reality for many businesses. Even though India appears to be in a better position as compared to its global peers, startup shutdowns have become inevitable here too. Many companies are resorting to closure after strategies such as layoffs do not turn out to be fruitful.

Since last month, many startups have shut down. For instance, coworking space Friyey, coworking space provider announced closure this month. "With mixed emotions, I share the news of the closure of Friyey, a venture that has been close to my heart for the past four years," wrote the company's founder and CEO Yogesh Thore on LinkedIn.

Startups in the crypto space are also facing regulatory uncertainty along with the overall economic downturn due to which some of them are opting to shut shop. For instance, Bengaluru-based crypto platform WeTrade shut its operations a few months ago and Flint Labs decided to stop its Flint Money app because of regulatory hurdles.

Short video is another segment that hasn't done well ever since post-pandemic normalcy was restored. Added to it they are also being forced to deal with the overall funding crunch. Last month, social media startup Tiki announced that it is shutting down operations effective June 28. "We regret to inform you that Tiki will be shutting down its operations. As of 11:59 PM India Time, June 27, 2023, all Tiki functions and services will cease," the company said in a statement. In February this year, Xiaomi-owned short-video platform Zili also said it would shut down its operations.

The latest to join the shutdown bandwagon is Deepika Padukone and Lightspeed-backed FrontRow. The startup is the third extracurricular activity business to shut shop. Before this, Crejo.Fun and SuperLearn had to wind up operations.

Should startups take the M&A route?

Mergers and acquisitions (M&As) seem to be an effective or rather the only way out for these startups. And, the good thing is there is enough buyer interest across the spectrum, say VCs and mentors. But before we talk about whether startups should opt for M&As or not, some thoughts on how long the funding winter may last.

While it's hard to predict for anyone as to when funding will return to normal, given the macroeconomic conditions, they feel that until startups prioritize scalability and demonstrate value to investors, the funding winter may persist.

"Until the VCs get exit from big startups they will not be able to fund B+ series for other growing startups," said Lesh Dixit, founder and CEO, Powerplay. "2023 will be another year of tight money, and startups that can cockroach (streamline processes, reach profitability and generate positive cash flow) will become the new unicorns when the macro environment improves," added said Jinesh Shah, managing partner, Omnivore, in an earlier interview.

Now, coming to M&As, since the beginning of May 2023, we have been seeing many acquisitions across startup sectors. Pepcoding, Prognosis Labs, CarLelo, KOOK, Tellephant and many others have been acquired. Ecosystem stakeholders believe that due to the global economic slowdown and the resulting funding winter, M&As are inevitable and are probably the only way out for many. Many large startups are also increasing their M&A drive budgets to cash in on the current scenario and drive growth. Experts feel that the current market conditions indicate a favorable environment for M&A transactions, as long as companies have well-planned strategies and the necessary financial resources to pursue transformative deals.

"The focus has also shifted to profitability and sustainability, and M&As provide a strategic means of business consolidation and expansion. Additionally, with the compression in fundraising, distress M&As may become more frequent," said Kavit Sutariya, general partner, CapFort Ventures.

Moreover, many startups which were in the early stage, wherein they would have soon found their product market fit, proven out unit economics and eventually become profitable in 3-4 years, are now in a fix. And before closing down, experts advise to try out M&As. "They have been stopped short in their tracks as growth capital has dried up, especially true for startups that were planning to raise Series A+ rounds in 2022/2023. They find themselves in a precarious position as they try to control burn, and rush to reach profitability while quickly running out of their cash runway. M&As are often the only way out for these startups," said Shauraya Bhutani, Partner, Breathe Capital.

There is also a heightened interest from traditional players and family-owned conglomerates. And, India has time and again also proven to be an attractive investment destination as the world's fastest-growing major economy.

Pivots can also turn out to a turning point for startups in the verge of closing. Pivoting is a matter of survival for startups. However, it is easier said than that. "The world is evolving very rapidly today. Technology is driving huge change but even markets or macro situations are changing. The pandemic is one such example. Pivoting, however, is not easy: it's a complete overhaul. Re-gearing the business model, changing the product, regearing teams, the requirement for funds, and at times almost restarting," said Padmaja Ruparel, co-founder IAN and founding partner IAN Fund.

Rapidly evolving market dynamics demand that startups remain nimble and adaptable. Considering these factors, it looks like we will see a lot of consolidation and pivots in the startup ecosystem and that could save many startups from drowning.