The funding winter is upon the start-ups. Not just in India, but globally, young businesses are feeling the pinch as inflation waxes and funding wanes. Indian start-ups have had a great run in the last decade. They have done some exceptionally great work and ushered in changes that would have taken decades otherwise. And in return, they’ve seen some great returns in the form of fundings and valuations.
But just as the celebrations for a record-breaking start-up funding of USD 42 Bn in 2021 begin to wind down, the funding tide looks to have turned in the wake of the global slowdown. It has been a swift march for Indian businesses from high market sizes and higher valuations to the midst of what looks like “The Great Layoff” after the post-pandemic euphoria, and matters don’t look particularly good.
Globally, experts believe this weather will last for the next 8-10 quarters. Start-ups and mature businesses finding their feet will be impacted severely in the next few years if they mean to continue as they’ve started. This is the time for taking a long hard look at your fundamental business design and aiming for dispassionate course correction. It is a tough road, but not an impossible one, and one that I have walked before. Here are my learnings from my years of heading a business:
Profitability has to be hardwired into the DNA of the business
The only way out of the hire-and-fire cycle is to rewire your business for profitability and turn into a profitable business that can withstand downturns. This is not a minor adjustment – it’s a fundamental shift in the business design. If the business plans fail to focus on profitability and accommodate for the downturns, there will be very little to keep it from falling into a vicious spiral. In the absence of profitable growth, the business’s answer to a capital crisis would be to cut costs. Lowering costs is the first slide into the spiral. With reduced costs comes a reduced revenue. This leaves the business with less money to grow. If the business stagnates, securing funding becomes more difficult, and with time, more critical. This spiral can continue until it consumes the business.
The way out of this spiral is long and hard and takes several more quarters than anticipated. Looking back, I can tell you all it takes to avoid this spiral is to leave market share and valuations behind and focus on a business model that keeps profitability at its centre and delivers on it in incremental amounts. A profitable business doesn’t happen overnight, but if your focus is unwavering, then you will meet profitability at the end of the road, and usually much earlier than you expected.
Build sustainability into the business
While explosive growth is exciting, it isn’t sustainable, especially when funding dries up. Without sustainability, a business cannot thrive and no matter what the bottom line looks like in the present, the next downturn of the business cycle will have an impact on the business’s ability to adapt. So not only must a business provision for profitability, it must also prepare for profitable growth. To achieve this, businesses must break the two important barriers to
profitability:
Untenable product-market fit: There was a time when the great toymaker, Lego, almost went bankrupt. In 2004, their sales were down 40% and their debts neared USD 1 billion. With a view to turn around their business, they sold off every part of their company that wasn’t an integral part of their core product – off went their theme parks, their in-house video game development, and more – while redoubling focus on their core business. By 2011, they were profitable again. More recently, Airtel engineered a major turnaround during the pandemic by moving out of the “telephone business” mode into a smartphone network model with a full range of inter-connected services that fed into each other. During the pandemic period of 2021-22 BankBazaar worked its way to EBIDTA profit through a customer-centric model. From a platform as a distributor for creditproducts, we branched out to co-branded credit products with our partners, which gives us more control on our products. This helped us secure revenue streams and improve cash flows, making the business sustainable. Whatever your route, getting the right product-market fit matters.
Uncontrollable cost of customer acquisition (COCA): A mis-match in product-market fit leads to escalating customer acquisition costs. While this would be high in the early stages of most businesses, this is a metric that needs to come down over time. When funds are not a concern, the idea becomes to acquire customers at any cost. But during a funding winter, this is no longer a luxury any business can afford. An immediate and drastic reduction in COCA will push the business into a spiral. So unless planned out in advance to be executed over time, COCA could be the biggest barrier to business sustainability.
This, too, shall pass
We started BankBazaar in 2008 pooling together our personal resources and some angel funding. In less than two months, the great recession of 2008 hit with the collapse of Lehman Brothers. That was not the best time for a fledgling business whose time even we weren’t sure had entirely arrived. Nevertheless we persevered, and one learning from these last 13-14 years is that tough times never go away completely and good times are always around the corner. This story of survival is not our story alone; this is also Amazon’s story, HP’s story, Microsoft’s story, IBM’s story, Hyatt’s story, and even Disney’s story. Some of the biggest businesses were set up in the middle of bad times and they thrived. Good companies will continue to grow through the downturn. The downturns are a part of the business cycles.
Every company goes through them every five years. While external factors intensify the impact, even without them, these cycles will turn like clockwork. A good business is one that prepares for a change in circumstances. Indian start-ups are quite used to turning adversities into opportunities, and we’ll see businesses streamline operations, cost structures, and monetisation models in the coming months and years. The challenge would be to do it faster than the slowdown catches up to them, and without slipping into the low-growth, low-revenue spiral.
(The author is CEO, Bankbazaar.com. Views expressed are personal)