The funding winter for startups is expected to grow colder with the SVB crisis and startup founders in India may now have to seek answers to a critical question — when to draw a red line to keep their businesses afloat. Vineet Nayar, former CEO of HCL Technologies and founder chairman of Sampark Foundation, in an interview with The Telegraph said that there are some important lessons to be learned for founders of Indian start-ups from the SVB crisis. But, there is no possibility yet for setting up a homegrown SVB-like funding agency and minimizing global risks. He also touched upon the near-term impact on the information technology sector from the SVB fallout and said that the pain of the layoffs would persist but there is not much to fear yet on the job front from increasingly powerful artificial intelligence such as Chat GPT.
In your view, how has the Silicon Valley Bank (SVB) crisis affected the Indian tech sector, early-stage companies and start-ups?
The uncertainty induced by the underperformance of the tech sector just got multiplied with the SVB collapse. What happens next is difficult to predict. However, we can look back at 2008 and understand three likely impacts we would see on the Indian IT industry.
Firstly the uncertain environment impacts new projects thus we would see a slowdown on new builds. Second, it puts cost pressure thus we will see increased outsourcing on one side but new rounds of negotiations for existing contracts. Lastly, it will force Indian IT to increase the deployment of AI tools to ensure this headwind does not impact margins. The impact on startup funding is expected to be quite brutal. Investors will swing towards cash flows instead of clicks as we clearly see in the edtech sector.
Thus start-ups would have to cut out fat and focus on profitable lines of business to stay afloat. The impact on employees will be high in the form of delayed joining, low investment in new skill building and fewer opportunities for global projects. However, it is a pain that will last for a limited time. In the medium term, the IT sector is headed only one way, up and up
Is there any lesson to be learned for the founders of Indian startups?
One predictable thing about bubbles is that they bust. Founders of Indian startups have to focus on businesses that are cash flow positive based on initial investments for them to be self-sustaining in hours of crisis.
It is a shame to see a good idea go down the drain because the founders run out of cash. Secondly not everything the funding entity prescribes is good for you. The founders have to think carefully about business continuity and survival and draw their own red lines so that they are not exposed to the SVB kind of risks. Lastly, they should hedge their bets.
Should Indian start-ups look at domestic sources of funding given the resilience of the Indian banking sector? Is there a need for SVBlike financial institutions in India to cater to the funding needs of start-ups?
Risk funding in India is very nascent and is a very small pool with a lot of questions attached. This has to do with us being largely risk averse and also not completely understanding the business model of spreading risks across multiple investments with the hope few will work. There is also an issue of trust in numbers, unlike a listed investment.
While the ideal solution is to have a more India-based funding pool however I see that unlikely to happen in the near term.
Most start-ups in India today are looking at not only overseas sources of funding but also global markets to expand and scale up fast. Will this development prompt startup founders to reconsider this?
I don’t think the focus on global markets will stop as these are the markets that will help build cash-positive businesses. Overseas funding will continue as the amount of investable cash is quite high and investment ideas in China are not looking that attractive.
However, more critical questions will be asked of founders regarding turning cash flow positive.
There is anticipation that a combination of weak global macroeconomic conditions and the SVB crisis could lead to revenue constraints with more companies delaying their IT spending. Do you see that as a possibility?
Yes, I definitely see this happening. Launching new transformational projects are as much about sentiments as about logic. If boards feel the environment is uncertain, they will slow down on projects.
However, we will see increased outsourcing to reduce costs and increased pressure to renegotiate existing contracts. In the near term, people will run to safety and watch costs. However in the medium term, the demand will come roaring back as technology is no more an option, it is a critical survival tool-so you can delay but not by much.
The tech sector is in turmoil with layoffs at many multinational organisations. Has the current churn ended or will it continue to persist?
The layoff trends are triggered by three factors. First, we were in a bubble of hope and that led to hiring businesses that were not grounded in logic. That bubble has finally burst. Second, the technology-led disruption was hyped all around including in media, and it’s translating into revenues was overestimated. With revenues not showing up to the party, the layoffs have begun.
Lastly, in the uncertain environment, which seems to have no visible end, is resulting in a drive for safety and employees are unfortunately the easy target. I believe there is more pain yet to come before we see the cycle reverse and hiring begins at hyper-scale.
A new iteration of Chat GPT has been announced by OpenAI. What in your view are the pros and cons of pushing the limits of AI? Can such AI impact jobs?
In the history of technology, Chat GPT or Open AI is akin to typewriters. When typewriters were first introduced in the late 19th century, they saved 40 minutes per hour compared to writing by hand.
Millions of typewriter jobs were created, and the practice of writing by hand dwindled in workplaces. Ditto when computers replaced typewriters. Jobs were lost. Jobs were created. The same will happen with Chat GPT/ Open AI. Humans have been very adaptive, and we need not fear AI.
Throughout the history of mankind, such productivity tools have brought economic progress. As long as productivity is enhanced, the advent of such tools will continue in the future. While the security concerns are valid, if I look at the past, we had similar concerns around the Internet. This is part of our evolution and it will never be bigger than the human mind. Thus we need to use it to our advantage and change our old behaviours and think about how the new world will learn, work and play with these new innovations.