The valuation of Meesho, the Indian e-commerce rival of retail giant Amazon, more than doubled last year to $5 billion, after marquee investors such as SoftBank and Fidelity pumped in hundreds of millions of dollars.
They aimed to ride a boom in India's tech startups, which raised a record $35 billion in new funds in 2021, but the tide has since turned, as corporate governance concerns loom large for investors facing a new uncertainty in global markets.
"We haven't seen a slowdown like this in at least five to six years. It is going to be brutal," said Anand Lunia of venture capital firm India Quotient, an investor in more than 70 startups since 2012.
"I expect to see a lot of zombie unicorns. Companies which became unicorns but have no business models have stopped hiring - they are not dying, but will become irrelevant."
Now Meesho is trying to raise debt and cut expenses after efforts to raise fresh funds of $1 billion floundered, making investors wary of its monthly cash burn of $45 million and stiff competition, two people familiar with the talks told Reuters.
Meesho did not respond to a request for comment.
But its struggles are among the first signs of a painful future awaiting many Indian startups.
Plummeting Indian tech stocks are a worry, but investors spooked by fears over corporate governance are stepping up scrutiny during due diligence efforts, which delays funding rounds, two venture capital executives said.
And there are concerns that valuations in India are already too high, even when startups' business models are being led by discounts and there is a bleak outlook for revenue, they added.
That could slam the brakes on the unprecedented growth and dull the lure of Indian startups.
Eight venture capital and startup executives said fears were growing that a funding crunch would lower valuations, leaving less cash to achieve growth and bring job cuts.
Lunia said he had told companies in which his firm has invested to ensure they hold liquid cash sufficient for at least 18 months, reduce spending and headcount, if necessary.
Just last week, BharatPe, an Indian payments startup backed by Sequoia Capital, said it would overhaul governance practices following an internal review.
Another startup Vedantu, which offers online tutoring courses and is backed by Tiger Global with a valuation of $1 billion, laid off 200 staff this month in a "load rebalancing" move it said was based on growth expectations.
Typically, Tiger has targeted bigger Indian startups, but it has now told bankers it will only consider deals involving those with a valuation of less than $200 million, in a bid to reduce risk, said two executives with direct knowledge of the matter.
Tiger did not respond to queries from Reuters.
"PREPARE FOR THE WORST"
With more than 60,000 startups in India, Prime Minister Narendra Modi has labelled the current decade a "techade", in which he added, "New unicorns are coming up every few weeks."
However, April was the first month in more than a year that India had no new "unicorns", a term for startups with valuations above $1 billion.
Indian startups raised $5.8 billion in March and April, down about 15% from the corresponding period last year, data from Venture Intelligence shows.
At a recent private dinner in the southern tech city of Bengaluru, executives of U.S.-based Insight Partners, which manages more than $90 billion in assets, told Indian founders it would target more early-stage companies and invest less because of the global tech rout, said one of those who attended.
Insight did not respond to a request for comment.
Many tech companies globally have suffered in recent weeks as the Ukraine conflict and rising interest rates hit investor sentiment.
Japan's SoftBank, which is India's biggest tech investor, with more than $14 billion in investments, has reported a record loss of $26.2 billion at its Vision Fund investment arm.
November brought India's first disappointment with a tech IPO when SoftBank-backed payments app Paytm crashed 27% at its debut, triggering criticism it had overvalued the company without prioritising profitability.
Paytm has plummeted a further 62% since. And while Indian food delivery firm Zomato and beauty retailer Nykaa had blockbuster listings, their shares are down 67% and 43% from their peaks, respectively.
Three Indian startup founders said their investors recently told them the days of easy money were over and they must now show a clear path to profitability.
The message, one of the founders says, is clear: "Prepare for the worst, hope for the best."