By Vikram Ramasubramanian
Venture capital for startups: In the ever-evolving landscape of venture capital, the term “funding winter”, has become a familiar refrain this last year. Funding winters are cyclical occurrences in the venture capital industry, characterized by a slowdown in investments. These periods often follow periods of excessive exuberance and capital injection into startups. Navigating these uncertain times brings to mind a quote from Warren Buffet: “Be fearful when others are greedy and be greedy only when others are fearful.”
Talking about numbers, according to recent data from Venture Intelligence, Private Equity and Venture Capital funding in Indian startups plummeted 79% to $3.3 billion in the January to May Period, from $15.7 billion in the same period a year ago. Further data showcased that startups secured only 247 funding rounds in this period, compared to 613 in the first five months of 2022. This showcases the slowdown in PE/VC activity over this last year.
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Unique Circumstances for Homegrown Venture Capitals
During these uncertain times, Indian homegrown venture capital firms have been taking centre stage in the startup ecosystem. The prolonged funding winter has forced a shift in focus from rapid and often unsustainable growth to more prudent investments. Here’s how these firms are making the most of this unique opportunity:
Quality over Quantity: Homegrown VC firms are placing greater emphasis on quality startups rather than blindly chasing quantity. Investors have become more cautious which has led VCs to ramp up their Due Diligence processes to only invest in the best startups. These VC firms are focusing on a startup’s long-term viability chances, differentiating characteristics from existing competitors, and finally, value add to consumers.
Patient Capital: The new mantra for homegrown VC firms is “patient capital.” Instead of expecting quick returns, they are willing to support startups for a more extended period, allowing for sustainable growth. VCs are playing a pivotal role in the strategic direction of their portfolio companies to help them navigate through these difficult times. They are also focusing on investor-founder alignment, which encourages collaboration between the Investors and founders, rather than putting pressure on the founders.
Strategic Partnerships: Many VC firms have begun forming strategic partnerships with corporates and other ecosystem players. These collaborations not only bring additional resources to startups but also create synergies that can drive growth. These partnerships can play a pivotal role in a startup’s success as they can provide access to resources, act as a source of validation & credibility, provide access to different customers, help with cost reduction, & help startups with scaling and distributions.
Shift in focus from Exponential Growth to Profitability: In response to the changing investment landscape and the lessons learned from past funding cycles, there has been a significant shift in focus. It’s not just about chasing short-term gains through reckless spending anymore. Instead, there’s a newfound emphasis on adopting a long-term vision that prioritizes the generation of internal sources of funding and profitability. This change in strategy includes a customer-centric approach, a keen eye on the burn rate and an innovative product.
Mentorship and Guidance for Founders: In recent years, the collaboration between founders and investors has offered a unique avenue for founders to accelerate their growth beyond financial assistance. The industry experience, knowledge, and guidance that investors contribute have become instrumental in startup growth. Founders now seek investors who bring not only capital but also expertise and mentorship to the table.
Looking Ahead: A Bright Future
As we move forward, it’s clear that homegrown venture capital firms in India are here to stay. Their resilience, adaptability, and focus on sustainability have positioned them as key players in the startup ecosystem. Business conditions will keep changing dynamically, but these firms are committed to nurturing the next generation of Indian unicorns.
In conclusion, the funding winter that began in 2022 has presented a unique opportunity for homegrown venture capital firms to shine. Their shift in strategy, emphasizing quality over quantity, deep sectoral expertise, patient capital, and a long-term vision, has not only sustained the startup ecosystem but has also set the stage for future growth. With government support and a resilient startup community, homegrown VC firms are poised for a bright future, regardless of the funding climate.
Vikram Ramasubramanian is Partner at Inflection Point Ventures. Views expressed are the author’s own.