Earlier this month, India witnessed the birth of its 101st unicorn, PhysicsWallah. This milestone is the result of the unprecedented boom in the digital startup ecosystem after the outbreak of the COVID-19 pandemic.

The country has given birth to 58 unicorns since the start of 2021. Whether ecommerce, fintech, SaaS, education tech or enterprise tech, most of them are digital technology startups.

Figure 1: As life starts to return to normal, can India's startup community sail through the move offline and the drop in available funding in the country?
(Source: rahul jarwal on Unsplash)

However, this milestone follows one of the slowest months (May 2022) in early-stage funding in technology startups in the country, according to Tracxn. In addition, the same month recorded a drop in late-stage financing, which reached below $1 billion in a month for the first time in a year.

I believe in unicorns

According to the National Association of Software and Services Companies (NASSCOM), India is home to the world's third-largest technology startup base. In 2021, it also had the third-highest number of unicorns, after the USA and China, according to the NASSCOM report.

As the COVID-19 pandemic wanes, the past few months have taken the sheen off the startup ecosystem.

A drop in funding and massive layoffs is the order of the day. Several startups, including Ola, Unacademy, Cars24 and Vedantu, have laid off employees. Some have also postponed planned initial public offerings (IPOs) because of the slowdown.

There are several reasons for this. The first is that as the pandemic shows signs of receding, the dependence on digital infrastructure has decreased. People are back in markets and banks and are not using digital infrastructure as much as they used to.

Some digital-first startups are now rethinking their business models. For instance, two of the biggest edtech platforms, Byju's and Unacademy, are now opening physical coaching centers.

What is it worth?

Secondly, experts are questioning how these startups were valued. The phenomenon is not unlike the bursting of the dot-com bubble in the 90s, when unrealistic valuations, sometimes without any clear business model, eventually led to a crash.

High valuations led to massive hirings and spending, but this is unsustainable now as both growth and spending have become muted.

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The third reason for the slowdown is the ongoing war between Ukraine and Russia, affecting economies worldwide.

Despite all this, the startup ecosystem is only likely to grow in the coming years. With fewer employment options, government support and the digital space making it easier to start a venture, the conditions are right.

This slowdown phase is corrective in nature and is expected to lead to the evolution of new business models.

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— Gagandeep Kaur, contributing editor, special to Light Reading