Have Paytm and Byju’s debacles dented Indian startups’ prospects? Experts weigh in

The recent challenges faced by high-profile start-ups, Paytm and Byju's, have sparked discussions on the evolution of the start-up and entrepreneurship landscape in India. Touted as the beacons of India's burgeoning unicorn ecosystem, the seeming crash of mighty multi-billion dollar Byju's and Paytm Payments Bank has shaken the edtech and fintech start-up spaces in particular.

For the uninitiated, Paytm's fintech arm Paytm Payments Bank (PPBL) has been hit with harsh regulatory limits by the Reserve Bank of India (RBI) — limits that essentially shut down the whole operation. The central bank said the move came as PPBL repeatedly failed to comply with banking norms and KYC requirements. Notably, however, the company's internally formed advisory committee is yet to begin deeper conversations to identify any issue, as per panel head M Damodaran.

Byju's on the other hand has been rocked with money laundering accusations against founder-CEO Byju Raveendran and belligerent investors intent on ousting him from the company. Raveendran is also battling Enforcement Directorate (ED) accusations related to the Foreign Exchange Management Act (FEMA), which he has denied. Once worth billions, the company's valuations have tanked abysmally compared to its glory days, with seemingly no respite close ahead.

Amid the uncertainty, we asked industry stakeholders to weigh in on the impact of these setbacks and share insights on the future trajectory of the start-up space in India.

A Big Hit: What has been the impact on India's entrepreneurship space?

BharatPe's Ashneer Grover acknowledged Paytm's pioneering role in India's fintech landscape, calling it the 'father of fintech' space in the country. Grover said that while he founded BharatPe, the company does owe its existence to Paytm.

"Paytm is the father of all fintechs in India. If it didn't exist, BharatPe wouldn't have existed. They (Paytm) introduced and built the behaviours of scanning a QR code to help money flow in India. The ecosystem was built after Google Pay and PhonePe came on the consumer side and BharatPe and Pine Labs came on the merchant side. So for the start-up community, this is sad," he said, referring to the central bank's actions.

Anirudh A Damani, Managing Partner of Artha Venture Fund views the setbacks as a recalibration for the start-up space from the "excesses of the 2021-22 boom".

"This phase is a cleanup, allowing for the emergence of startups that will define the next growth cycle. These instances underscore that valuations are secondary to sound execution and fiscal discipline. They remind us that true success is measured by profitability and real impact, not just market valuation. This period should be viewed as an educational chapter for entrepreneurs, emphasising the importance of humility, fiscal prudence, and regulatory compliance in building sustainable businesses," Damani told Mint.

Neokred CBO Vivek Sridhar echoed the sentiment that this is a period of caution and learning for start-ups. "Both Byju’s and Paytm-related issues have created a perception that startups are not to be taken seriously and that the start-up ecosystem does not work on the regulatory guidelines. But they are just perceptions or opinions. All serious start-ups take the regulations very seriously and are constantly adapting to the regulatory changes."

"Paytm is good learning for the start-up ecosystem on how not to do things and follow the regulatory guidelines to ensure business continuity. And from Byju’s we learn how to effectively manage a company which sees rapid growth in a short period especially when one is pegged to become a unicorn," he added.

Sridhar was also optimistic that with the constant regulatory changes and learnings from others' failures, the start-up ecosystem will become even stronger in the coming years. "The current age start-ups no longer work towards just getting the valuation but are becoming more responsible towards the customers, ecosystem, and sustainability by delivering early profits and long-term existence," he noted.

Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, highlighted the rise in caution among investors. "The recent struggles of high-profile startups like Paytm and Byju's have undoubtedly caused a dent in investor confidence and overall enthusiasm for the Indian startup ecosystem. This could lead to increased scrutiny from investors, tougher funding conditions, and a slower pace of growth for startups in the near future," he noted.

He however also noted that the issues are related to “individual company” and "not necessarily indicative of a systemic problem within the Indian startup ecosystem", adding: "The underlying factors that fuelled the startup boom — large young population, increasing internet penetration, and government support — are still very much in place."

Enthusiasm for FY24: What is the industry outlook?

Despite challenges faced by specific start-ups, experts expressed optimism about the overall business outlook for the Indian start-up ecosystem in the fiscal year 2024.

Amit Goel from Pace 360 highlighted the sustained growth of India's digital economy, anticipating fresh opportunities for start-ups in FY24. He credits government initiatives like Startup India and Digital India for fostering a favourable environment.

Damani sees the business landscape in 2024 as a strategic juncture, with optimism already priced into the markets. He anticipates a strong recovery post-elections, attracting foreign capital and signalling a resurgence in both public and private markets.

"Observing trends in SME IPOs and stock markets, it’s clear that optimism is already priced into the markets, anticipating continued growth across all sectors. A lot of foreign capital is poised at the sidelines, ready to flow in post-elections, signalling a strong recovery, especially in early-stage markets. This period stands as a strategic juncture, promising a vibrant resurgence in both public and private markets once the elections conclude," Damani added.

Mayuresh Raut, Managing Partner, Seafund however was cautiously optimistic regarding the stability of the funding climate by 2024-end. "There is cautious optimism that the funding climate will stabilise by the end of 2024. New capital pools have emerged, like private family offices, corporate venture arms and the government has large initiatives that aim to attract more foreign and domestic investment," he said.

He added that India's large market size and digital adoption trends are generating global interest and the expectation is that a lot of the policy and regulatory framework that has been built out over the last decade will continue. Raut also believes that "savvy investors are looking to cash out of the public markets and deploy funds in startups".

He also noted that venture capitalists are sitting on funds that will steadily make their way into the ecosystem.