After the heady rush of initial years, Indian start-ups went through a churn in 2016. A spate of mergers beckons this year, as local firms brace against a global onslaught. He was a 26-year-old young achiever. A dropout from India's premier tech institute -Bombay IIT. A chief executive officer of a company he himself co-founded with 11 others. A man who became the toast of the nascent start-up ecosystem in India when within two years, five rounds of funding, a list of investors as prestigious as Japan's Softbank, Qualcomm Ventures, Nexus Venture Partners and Helion Venture Partners, valuation peaked at $220 million. The rise and eventual fall of Rahul Yadav, founder of one of India's first real estate portals Housing.com, symbolises the Indian startup story so far - a promising start, meteoric rise, unrealistic valuations and eventually a dose of reality. Yadav had for a good three years, between 2012 and 2015, captured everybody's attention and polarised opinion - some detested his brash and arrogant attitude while others saw a bit of 'Steve Jobs' in him. Having successfully raised funds - $110 million by 2014 -Yadav went on a marketing blitzkrieg that riled its investors. A pitched battle followed, which ended with Yadav resigning in May 2015, being coaxed back and then fired two months later. Earlier this year, it was merged at a valuation of just $70-75 million with rival PropTiger. That it happened with Yadav in 2015 when the start-up boom in India was at its very peak only highlights its relevance. A heady start The first sign of the beginning of the era of start-up was in the pre-global economy meltdown days of 2006-07. A stable world economy that enabled an export-led growth for India, favourable demography with over half the population at less than 25 years of age resulted in a young restless population budding with entrepreneurship, creativity and enthusiasm. Unlike in the past, the proliferation of angel investors - funders ready to provide seed capital at far relaxed terms than a bank - and venture capital funds -that manage money of investors looking for high risk, high reward investments - meant there were enough to money going around. It was during this time that some of the most high profile technology internet start-ups began their journey. Companies like Flipkart, InMobi, Zomato, GirnarSoft, Meru cabs and Quikr, which would go on to become unicorns with valuations of over $1 billion, were founded. These would over the next decade, redefine not just the contours of entrepreneurship but also urban life in India. If Flipkart was the flag-bearer for this generation, with Sachin and Binny Bansal starting off by selling books from their bedrooms before scaling up to become India's top ecommerce company, others too built the market along with their businesses from scratch. “Driven by factors such as availability of funding, consolidation activities by a number of firms, evolving technology space and a burgeoning demand within the domestic market has led to the emergence of start-ups in India,” says D.S. Rawat, secretary-general at industry lobby ASSOCHAM. India's attractiveness for global venture capital funds was obvious. A thriving under-penetrated consumer driven market with scope for exponential growth, increasing internet penetration and favourable consumer demographics made India the big investment opportunity. What also helped was that the only other country with better prospects - China - was out of bounds for these investors. The merits outweighed the multitude of operational, regulatory and taxation issues that otherwise plague businesses in India. The flow of investment steadily grew. Between 2010 and 2014, the infusion of Venture Capital and Private Equity funds increased from an estimated $13 mn to $1,818 mn while angel investment too multiplied almost eight times from $4.2 mn to $32.2 mn. Raising funds, either to start a business or to expand an existing enterprise, otherwise considered the most difficult task was no longer onerous. While scores of start-ups were incubated during this period - more than 3,100 startups in digital products were active in the country by the end of 2014 making it the fourth largest nation in the sector - it was also during this time that companies started going in for multiple rounds of funding. Flipkart, Ola cabs, Zomato and Snapdeal for example between them went in for more than 30 rounds of funding from VC and PE firms, raising an estimated $2.2 billion. Flipkart, the biggest start-up in India, raised funds on six occasions alone between 2010 and 2014, garnering in excess of $750 million in the process. That was just the start and the peak was yet to come. PE activity in 2015 touched an all-time high - investments totalled 1,049, over 600 of them in start-ups. With angel investments in tow, more than 9,462 start-ups (including non-technology) were founded during the year. The quantum of fundraising also shot through the roof. Flipkart raised $700 million, Snapdeal $500 million, Ola cabs raised over $1 billion in three tranches while e-wallet firm Paytm raised nearly $900 million in two rounds. Overall, capital worth $9 billion was invested in Indian startups in 2015, which was equal to the cumulative funding between 2010 and 2014. Online and mobile categories dominated the deals. Number of active investors increased from 220 in 2014 to 490 in 2015, as per a report by NASSCOM. As a result, the stars of Indian e-commerce became super stars. Existing unicorns like Flipkart, Snapdeal, Ola cabs, InMobi, Paytm, Quikr, Zomato and MuSigma became even bigger while newer players like ShopClues joined the club. For a time, it seemed like nothing could go wrong. In January 2016, the government too joined the fray launching the Start-Up India programme. It put in place a special support structure for innovative startups, differentiating them from micro, small and medium enterprises that are largely based on traditional business models, providing funds directly through the India Aspiration Fund that was given an initial tranche of Rs 2,500 crore, a liberal patent regime with an 80 per cent reduction in registering patents for start-ups, a tax holiday for three years and exemption from capital gains tax. All the projections pointed towards a rosy future. Nasscom said the number of start-ups in the country would continue to go up and there would be over 10,000 start-ups by the end of this decade employing 2.1 lakh people. Reality check The years of manic growth however, had hidden the fundamental flawed business models most start-ups were employing and it came to the fore in the very next year-2016. Most of the start-ups in India had just one single business plan, which was then tweaked depending on where they stood. If the entrepreneur had an original marketable idea or was a first-mover even with a model replicated in other parts of the world, it would raise seed capital and expand expeditiously. If they happen to be a late entrant with competition from other existing players, it would promise investors a speedier expansion and better customer service. The key here was to convince investors that over the medium term the others already in the business or likely to join in future, would either fall by the wayside in the face of their aggression or be bought over. In all these business models, the most vital cog is to acquire consumers in as many numbers and as fast as possible. The growing penetration of internet, rising sale of smartphones - 109 million were sold in 2016, ever decreasing data charges in India -Reliance Jio offers 1 GB data at Rs 12, the lowest in the world - and improvement in cost of logistics and freight-enabled companies to even tap hitherto untouchable smaller town markets online. The expansion of this marketplace along with proliferation in the number of start-ups and intense competition provided a heady mix. Acquiring consumers, however, meant burning money and it became a game of one-upmanship. Over a period of time, a Flipkart or a Snapdeal, Ola or Taxiforsure, Makemytrip or yatra.com began to look like mirror images of each other and consumers bought products based on who gave them the best deal. Profitability was not a priority and barring a bookmyshow.com or infibeam, all start-ups bled. According to Kotak Institutional Equities Research, in fiscal 2015, 22 e-commerce businesses ran up over $1.2 billion in red ink. Flipkart led the way. What upset this applecart was when global heavyweights like Uber in transportation and Amazon in online retail stepped on the gas in India. Despite being well funded, the Indian companies like Flipkart, Snapdeal and Ola cabs, did not have the might to compete with these firms with even deeper pockets. In a game where the winner takes all, as Uber and Amazon started making giant strides in India, investors suddenly realised local firms that had been funded all this while, may not come up trumps after all. After the peak of 2015, what followed in 2016 was a sobering reality check where investors finally started to ask questions on profitability, returns and sustainability. Mere revenue growth was not enough to secure funding and fundraising dried up. Even some of the biggest investors lost money - Sequoia and Matrix in TinyOwl ($46 million); Catamaran, Nexus, and Qualcomm in Yebhi ($41 million); ruNet, Mangrove Capital, and Springstar in BeStylish ($26.3 million), Indo-US Venture, Matrix, Draper Fisher Jurvetson in SeventyMM ($20 million); Indo-US Venture in Indiaplaza; Lightspeed and Helion in Fashionara. Many start-ups began to shut shop - Dazo, PepperTap, AskMe, AUTOnCAB, Fashionara, Purple Squirrel, Zupermeal, BeStylish, Localbanya. According to Xeler8, a Delhi-based research firm, 997 of the 2,281 start-ups founded since June 2014, are already dead. The cookie started to crumble and even the unicorns felt the heat. Flipkart and Ola cabs joined hands to lobby and played the nationalist card seeking protectionist measures against Amazon and Uber accusing them of dumping foreign capital to buy consumers in India. Flipkart even complained about Amazon copying its own model. As the government looked away - Indian start-ups were as much funded by foreign investors and it was actually Flipkart that copied the Amazon model - investors were not impressed. A series of valuation markdowns began. Ola′s latest round of $300 million funding from Softbank earlier this month was estimated at a 30 per cent markdown from its peak valuation of $5 billion. In all, Flipkart has had five markdowns till date. Fidelity partners valued the firm at $5.56 billion in November 2016, nearly a third of its $15 billion peak valuation. Snapdeal too has suffered a loss in valuation and estimates suggest it may be worth just $4 billion as opposed to its peak valuation of $6.5 billion. "They tried to be everything to everybody. It just doesn′t work," says Sanjay Nayar, member and CEO of KKR India. "Entrepreneurs raised money at crazy valuations. All over-stated and over-estimated consumption and growth. Very few succeeded. If you don′t make money, how do you value a company " The government's Startup India programme simply happened at the wrong time with the sector overheated with funds. The number of new start-ups declined by 67 per cent in 2016 over 2015. The programme received only 1,368 applications till December 2016 of which only 502 were approved by the Department of Industry Policy and Promotion (DIPP). The dose of reality was probably required in the domestic start-up ecosystem. What is likely to follow is a consolidation among local players as they brace themselves against global rivals. Over the years, the sector has seen a number of takeovers - Ola cabs and Taxiforsure, Cartrade and Carwale, PropTiger and Makaan and then Housing, Myntra and Jabong, Makemytrip and Ibibo, PayU and Citrus Pay. The mother of all deals is currently being worked out by Softbank between Flipkart and Snapdeal. “There is room for not more than three players. If Snapdeal gets out of the picture, it is Amazon, Flipkart and Alibaba-backed Paytm and there is enough room for these three to exist,” says Harshad Lahoti, chief executive of ah! Ventures, an investor network platform. In the battle for survival of the fittest, the biggest of the lot will float. The rest will likely meet the same fate as Yadav of Housing.com whose second business venture failed to take off. A second chance at success is not easy to get.