Approximately 94% of Indian startups backed by SoftBank have managed to secure cash reserves for at least a year by implementing cost-cutting measures, according to a research note by Bank of America (BofA). The report sheds light on the efforts made by these startups to navigate the challenging funding landscape in India.
Reduced Growth Rates and Strengthened Cash Reserves
In recent months, Indian startups have demonstrated their resilience by focusing on cost-cutting measures, resulting in a significant decrease in growth rates from 60-80% to 15-30%. However, these efforts have proven effective in bolstering their cash reserves. BofA's research note reveals that as of March 2023, 94% of SoftBank's investee companies in India had cash runways of a minimum of 12 months.
SoftBank's Key Role and Adjusted Investment Approach
The current uncertain economic environment has compelled SoftBank to adopt a more cautious investment strategy. The research note highlights a considerable slowdown in SoftBank's investment activity in India over the past couple of years. In 2022, the company made only three investments, and so far in 2023, it has not made any new investments.
Moreover, SoftBank has adjusted its valuation benchmarks, decreasing them from USD 5 billion to approximately USD 2 billion. The investment size has also shrunk from USD1 billion to USD 100 million-150 million. Additionally, SoftBank's ownership stakes in these companies have decreased to below 25%, and it has taken only one board seat. Furthermore, the company has started collaborating with the private equity and venture capital ecosystem in India, aiming to diversify risks within its fund portfolio.
Focus on Unit Economics and Break-Even Milestone
Amidst ongoing uncertainty, companies backed by SoftBank's Vision Fund are placing greater emphasis on strengthening their unit economics. This shift in focus has led to over 40% of the investee companies approaching or surpassing the break-even point, according to the BofA research note.
Prominent SoftBank Portfolio and Indian Startup Landscape
SoftBank's portfolio in India includes significant players such as fintech major Paytm, logistics player Delhivery, foodtech platform Zomato, and insurtech startup Policybazaar's parent company, PB Fintech. The listed companies within the portfolio collectively contributed over USD 100 million to SoftBank Vision Fund 1's books in the quarter ending March 2023. Additionally, SoftBank has invested in other notable startups such as Globalbees, OYO, Ola, Flipkart, Meesho, and Lenskart. India stands as the third-largest market for SoftBank in terms of investment deals, following the United States and China.
Challenges in the Indian Startup Ecosystem
While SoftBank-backed startups have managed to maintain their cash reserves, the broader Indian startup ecosystem continues to grapple with a funding crunch. Funding raised by startups witnessed a significant 66% year-on-year decline in April 2023, amounting to USD 888.45 million. The number of funding deals also plummeted by 60% year-on-year, reaching 61 in the same month. However, despite these challenges, venture capital firms, angel investors, and private equity investors have announced the launch of 32 funds, amounting to over USD 3 billion, to support Indian startups at various stages throughout this year.
As the Indian startup ecosystem continues to evolve, stakeholders remain optimistic about the prospects of these innovative companies and their contributions to India's economic growth.