Thread by @AbhinavAgarwal

1/
A short thread on the boom in startups and their valuations:
Interest rates have been low in the US for more than 10 years. The Fed Funds rate has been at 0.25% since 2008, except for a few years during the Trump administration when they rose to 2%. They are back to 0.25% now.

2/
Quantitative Easing (QE) has pumped in trillions of dollars into the US economy.
Clearly, the money has to go somewhere and VCs need returns.
Startups is where some of that money has gone.

3/
The startup party has never had it so good.
Companies with zero profits, no business plan or hope in hell of ever getting profitable, became "unicorns", making their founders, funders, and some employees rich beyond imagination.
Good.

4/
Every bubble bursts. Every bubble. Every single time.

You can't keep pumping money into an economy without having inflation raise its ugly head.
This is what is happening in the US now.
The annual inflation rate in the US has topped 6.2% in Oct`2021 - the highest in 30 years.

5/
So you need to raise interest rates sooner or later. Econ 101.
What'll happen when you raise interest rates in the US?
1. Some, or a lot, of VC money will make its way back to the US.
2. Startup funding will dry up.
3. Valuations will tank.
4. A firesale will take place.

6/

5. Late-entrant VCs will be left holding the can.
Lucky are the ones who have gone IPO.
Lucky, as in those VCs and founders who will cash out. For once the company is listed and the honeymoon is over, investors will demand profits to justify P/E ratios and valuations.

7/

Companies (most "unicorns") with no business model, no operational skills, and no competitive advantage will suffer.
Retail investors will be left holding the shitcan.

But.... will interest rates rise in the US?

8/
But.... will interest rates rise in the US?
If they do, suddenly the US' debt-servicing costs will go up. Where is it going to get all that money from? Especially when the administration wants to spend another trillion or two or more to jumpstart the economy?

9/
Print more money? Oops, can't do that. Inflation and all that, remember?
If there're two things that cost US Presidents elections, it's jobs and inflation.
What, I don't know.
2022 will be interesting for the Indian startup scene.

10/
Remember - throwing hundreds of crores of rupees into asinine ads with celebrities is NOT an operational skill.
Operations, processes - these "boring" things take time, patience, and skill.
Much easier to pfaff around with made-up numbers in Excel and jazzed up PowerPoints.

Is this the retail investor being royally screwed (yet again), or is this just caveat emptor?

Let's take a hypothetical example:
Revenue: ₹890 crores, growth of 47% (YoY)
Costs: ₹887.8 crores
Profit: ₹1.2 crores, down 92% (YoY)
Two weeks after IPO.

Hypothetical example.
Q2FY22
Revenue: 1,086 crores
Loss: 425 crores
Company raises ₹ 18,000 crores.
Lists at a market cap of one lakh crore ₹.
EPS??
Its 'contribution margin' is a sad 24% (which is selling price per unit minus variable cost p.u., assuming ZERO fixed costs🤦‍♂️🙄)

The party is coming to an end.

"Fed will aggressively dial back its bond buying, sees three rate hikes next year"

cnbc.com/2021/12/15/fed…

The US Consumer Price Index for All Urban Consumers (CPI-U) increased 8.5 percent over the last 12 months before seasonal adjustment.

This is the highest in 41 years.

bls.gov/news.release/c…

US Fed raises rates by 50 basis points.
RBI raises repo rate by 40 basis points.

Scroll up the thread to see why it was inevitable and the impact it will have.

Startup founders and their funders are too smart to not know this was a bubble. But as long as the money poured in and the valuations sky high, no one cared.
And now when the layoffs are coming, they still don't.

Because there is no business model. None.

"Healthtech Startup MFine Fires 75% Workforce, 600 Employees Impacted"

"the startup has completely exhausted its funds."

Raised $17M in Series B funding in Feb 2021, $48M in Series C in Sep 2021.

inc42.com/buzz/exclusive…

Putting these tweets here, on the lethal concoction that easy money, oversized ambitions, metacognitive incompetence, and unbridled greed brewed in the startup world.
With the bubble starting to burst, what we will see is a spate of rationalizations.

Edtech startup Invact Metaversity
Feb 2022: raised $5M
May 2022:
Co-founders exploring "(a) cutting the burn rate and pivoting to another idea, (b) letting one of the founders take full charge, or (c) returning the unspent capital to investors."

moneycontrol.com/news/business/…

GoT phraseology aside, one has to wonder whether these leaders have any idea about the fundamentals of running and growing a profitable business.

But, as I have said before, there is often little correlation between competence and success.

moneycontrol.com/news/business/…

April 2022: Meesho lays off over 150 employees from grocery biz as it restructures vertical

Sep 2021: Meesho co-founder tweets about "regressive constructs of parenting"

Sep 2021: "Fidelity, B Capital lead $570 mn funding in Meesho, valuation more than doubles to $4.9 bn"

Info Edge-backed edtech startup Udayy shuts down, lays off all employees

Err... were they profitable when kids were at home?🤔
"As the kids went back to school, we faced roadblocks in growing the original model of online, live learning."

moneycontrol.com/news/business/…

Info Edge-Backed Yojak Shuts Domestic Operations, Lays Off Around 140 Employees

"Between January and February it was hiring-hiring, and in April and May it was firing-firing"
@Inc42
inc42.com/buzz/info-edge…

High inflation, high interest rates, slow(ing) growth.
Nowhere near a bottom yet.

MPC expects retail inflation to be 6.7% for FY23.
"The Reserve Bank of India's monetary policy committee (MPC) hiked the repo rate by another 50 basis points on June 8"
moneycontrol.com/news/business/…

"Fashion B2B e-commerce startup Zilingo Pte paid ₹68 crore to firms owned by or related to Sandeep Kapoor, a former general counsel... at Sequoia Capital India, the Silicon Valley venture capital firm said in a court filing on Saturday."
livemint.com/market/sequoia…

From May 2022.
"Sequoia Capital-backed Singapore-headquartered Zilingo said on Friday it has fired its chief executive officer Ankiti Bose 'with cause', following an investigation by a forensic firm into alleged financial irregularities."
vccircle.com/zilingo-fires-…

"WhiteHat Jr, owned by Byju's, has laid off 280-300 employees, after over 800 employees tendered their resignations in May"
#edtech
#valuations
moneycontrol.com/news/business/…

Remember "Wolf Gupta"?
ca.news.yahoo.com/wolf-gupta-byj…
"Who Is Wolf Gupta? Byju’s WhiteHat Jr Latest Marketing Gimmick Is Making Netizens Furious, Here’s What We Know So Far About the 'Fictitious' Kid Apparently Working As AI Researcher at Google"

and:
forbesindia.com/article/specia…

"Byju's (currently valued at $22 billion) has laid off over 2,500 full-time & contractual employees from Toppr, WhiteHat Jr, & its core team across sales & marketing, operations, content & design teams, sources told Moneycontrol."

#edtech
#valuations
moneycontrol.com/news/business/…

Governance 🪦
Zomato acquires Blinkit for ₹4,447 crores.

Zomato losses, FY 22: ₹1222 crores.
Blinkit (formerly Grofers) losses, FY21: ₹6,127 crores.

Oh, by the by:
Zomato co-founder is Akriti Chopra.
Blinkit founder is Albinder Dhindsa.
The two are married.
To each other.

"Ola has started handing over pink slips to employees across software teams. Sources told CNBC-TV18 that at least 500 employees are likely to be laid off across different software verticals of ANI technologies."

#BubbleEconomy
@moneycontrolcom
moneycontrol.com/news/business/…

"Oxshott’s fake investment in Byju’s and a missing Rs 1,200 crore

Last September, the edtech company announced the investment. Nine months on, there is no sign of the money or the investor."

#edtech
@MorningContext
themorningcontext.com/internet/oxsho…

Spent ₹1.85 to earn ₹1.
Lost ₹51 lakh rupees an hour, every hour of every day of the year.

Revenue:
FY20: ₹2,704 crore
FY21: ₹2,428 crore
FY22: ???

Profits:
FY20: ₹262 crores (loss)
FY21: ₹4,500 crores (loss)
FY22: ???

#BubbleEconomy
moneycontrol.com/news/business/…

2019: Rivigo (logistics startup) valued at $1.05 B
2022: B2B express unit of Rivigo sold in a slump sale for Rs 225 crore (~$28M).

FY21: total revenue ₹634 crore, of which B2B express business was ₹295 crore (46%)

economictimes.indiatimes.com/tech/startups/…

"Edtech firm Byju's has allegedly closed down their Technopark, Thiruvananthapuram office & are forcing their employees to resign, Minister for General Education and Labour in the Kerala Govt, V Sivankutty said on social media platform Facebook."
@livemint
livemint.com/news/india/byj…

Harvard case-study for future MBA leaders.

Byju's buys Aakash for ₹7300 crores so that Byju's can borrow ₹300 crores from Aakash for basic business expenses.

"Byju's borrows Rs 300 cr from its subsidiary Aakash for 'principal business activities'"
moneycontrol.com/news/business/…

This is so bad at so many levels.
Horrible bosses with zero empathy.

"I realise that there is a huge price to pay for walking on this path to profitability."

FY21 marketing spend: ₹2,500 crores
Contract with BCCI: ₹454 crores
FY21 losses: ₹4,589 crores
#startups #bubble

Layoffs are tough on employees & on empathetic bosses also.

◯ 14 weeks severance pay.
◯ 2022 annual bonus for all departing employees.
◯ Pay all unused PTO time.
◯ Cash equivalent of 6 months of existing healthcare premiums.
◯ Accelerated RSU vesting
stripe.com/en-gb-nl/newsr…

Chargebee
Raised: $470M
Valuation: $3.5B
Revenue: $70M(?)
Profits: 🔔
May 2021:
Forbes India: " clarity, customer focus, and a leap of faith to make it big".

Nov 2022: “...operational needs across the company, which is impacting our ability to execute”

livemint.com/companies/star…

Aug 2021: Unacademy raises $440M at a $3.4B valuation
April 2022: Lays off 600 employees
June 2022: lays off 150 employees; calls it 'standard practice',
Nov 2022: lays off 350 employees
#BubbleEconomy
thehindubusinessline.com/news/education…