How a US Recession Could Impact India’s Startup Ecosystem

If you watch the news regularly, chances are the news of the US recession has captured your attention. Well, this is not the first time we are seeing an economic downturn hitting the startup world.

Just like every sector, the startup is affected by the global economic downturn. But what exactly does the US inflation, pandemic, and European war impact on the Indian startup ecosystem?

To cut a long story short, it has a good impact on early-stage startups, while for IPO investors, it might not be good news.

Here in this blog, we will learn about the recession, what impact exactly the US recession will have on Indian startups, with some recession survival tips for Indian startups.

What Is A Recession?

A recession is a long downturn in economic activity that happens when goods and services value falls for two or more successive quarters. This business cycle contraction reflects the fallen value of goods, lowered income levels, industrial production, and stock prices.

What Is A Recession In Startups?

No business is immune to the effects of the US recession. Tech startups have laid off large numbers of employees, and with funding drying up the situation is envisioned to get worse.

This economic downturn has become worse due to geopolitical concerns, for example, Russia-Ukraine War. Hence, many businesses suffer from

• High Inflation
• High-Interest Rates
• High Price Of Oil & Gas
• High Layoffs

All these make it harder for early-stage startups to access capital. As banks and investors become more selective in their new investments.

Hence, startups can expect lower valuations, lower financing round sizes, and fewer deals.

US Recession Impact On Indian Startups

There’s no crystal ball to exactly predict the impacts of the recession on Indian startups; however, below are some of the common ways in which a recession can impact startups.

Impact of Recession on Startups

Low Consumer Demand & Spending

Consumers tend to tighten their budgets and cut down spending during a recession which can significantly impact startups dependent on consumer spending.

To maintain customer demand and spending, startups will need to adjust their product or service pricing and offer discounts or promotions.

Less Funding Opportunities

The second issue that startups can face is less availability of funding during a period of recession. Traditional funding sources, like banks and lending institutions, become less interested in extending credit to startups as investors and venture capitalists become more mindful of investing.

Hence to keep their startup running, they will need to look for alternative funding sources that include crowdfunding, angel investors, and government funding.

Higher Competition & Consolidation

Many startups might struggle to survive during a recession leading to increased competition for consumers and market share.

To add more, big businesses may take advantage of the economic downturn to acquire smaller startups which ultimately leads to increased industry consolidation.

Survival Strategies

Recession can bring a lot of difficulties, but with proper survival strategies, startups can improve their chances of surviving the recession and thriving in their business.

How US Recession Is Impacting On Early Stage Indian Startups?

Now talking about the current recession i.e. US Recession, below is what we found startups are experiencing in India.

Longer Investment Rounds

Pre-seed and seed velocity has been noticed to slow down a little, but the later stage has been delayed considerably. The investment rounds are now taking about 3-6 months longer to close the deal.

Lower Valuations

Startup valuations are coming down where early-stage startup deals are pricing 15-20% lower and later-stage startup deals are pricing 30+% lower.

Lesser Deals

The competition for best startup deals is expected to remain strong in the current year, 2023. However, all the firms today believe that 2023 is the best pace of investing.

How Indian Startups Are Being Impacted By Funding Slowdown?

India has turned out as the third-largest startup ecosystem in the world with Indian startups experiencing impressive growth of almost 15 times between the years 2015-2022. This growth has been due to a sudden surge in investors and incubators.

However, the funding winter and global investments have been found to be a slowdown in the recession period, which ultimately is affecting the growth of Indian startups. From small to big, many startups are struggling to meet their end goals, with cost-cutting measures such as layoffs and others.

To survive in this challenging recession, startups are needed to focus on their unit economics, simplify operations, and plan mindfully for business scalability.

Startup founders who are flexible and well-prepared to deal with the upcoming expansion changes and challenges are more likely to attract investors during the recession.

By and large, startups that prioritize innovation and are prepared to disrupt the norm are more likely to thrive even during tough times like recession.

Why Recession Is Good For Early Startups?

There’s no doubt that recessions are challenging, but they can also be good for startups. How? 

It might be hard to believe, but a recession can be the perfect time for your startup to position itself for long-term success. 

Early-stage Indian startups may face limited funding options and smaller rounds but businesses always have pain points that other companies can help solve. That’s why many investors are still willing to take risks if they believe in the idea or product.

On top of that, a bad economy can help remove companies that provide poor or unnecessary services. So if your startup has a good idea and a solid foundation, you better don’t quit. For later-stage or well-funded startups, it could even be a good chance to acquire competitors struggling to survive.

How Indian Startups Can Survive Recession?

• Make sure you have adequate funds to survive any unforeseen situations.
• Optimize startup costs without compromising on the quality of the product or service to improve financial health in the long run.
• Stay agile to adapt to the dynamic market conditions
• Take good care of employees by maintaining a positive work culture, and providing employee benefits to help retain talent while keeping them motivated.

Finishing it up

Financial uncertainties are common in business. And it might bring a lot of challenges to running the business smoothly. Talking about the US recession, it has made a significant impact on Indian startups, both in a good and bad way.

No business can ever know for certain if there will be any recession in the coming years. Hence, what’s left is to be cautious about how you can survive the recession in India.

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