By Priyadarshi Nanu Pany
Only a few months back, start-ups were the apple of the eye for investors. Fundraising was easy and deal-making as swift. India, the third biggest start-up ecosystem after US and China, minted a unicorn almost every week. But a tsunami of global headwinds has buffeted the shores that sustained the high cash-burn start-ups. The blockbuster days of funding are passé. The once abundant liquidity in the hands of big venture capitalists is now trickling fast. Enter the age of runaway inflation and spiralling interest rates in the US- they are having a knock-down impact on start-up funding. Add to this the Russia-Ukraine conflict and the ballistic energy prices, and you realize the crisis has reached its full crescendo. The sentiment in the start-up community, though, is muted as the bull run has morphed into a bear gait.
In a changing landscape, moneybags have turned circumspect. Sequoia Capital which has invested in 30 unicorns in India, including Byju’s, has advised its investee companies to do belt-tightening as investors are cutting down on investments in public and private markets and instead parking funds in bonds. Market intelligence firm CB Insights reported that venture funding to India-based start-ups fell to $3.6 billion in the second quarter of 2022 from $8 billion in the first quarter and over $10 billion a year ago.
In 2022, five of the five largest venture deals by start-ups have been led by sovereign wealth funds and pension funds, such as Ontario Teachers’ Pension Plan, Canada Pension Plan Investment Board, and Qatar Investment Authority. Private Equity (PE) and Venture Capital (VC) firms are now in the backseat. SoftBank Group and Tiger Global, both of which have been aggressive investors in Indian start-ups, have said they will slow investments this year.
The scenario has set in a vicious cycle- cost-cutting, declining business metrics, low investor interest and talent flight. As expected, start-ups are taking the knee-jerk steps-shutting down non-core verticals, laying off employees, paring vanity marketing spends and going on a hiring freeze. According to the Inc42 layoff tracker, over 11,000 employees were fired in the first six months of this year. Industry watchers anticipate more retrenchments as mature and growth-stage start-ups will find the going tough to raise funds.
Indian start-ups have sunk into a fund crunch. Per industry estimates, they need $10-15 billion over the next six months, but only $2-4 billion is available. VCs have turned wary and vigilant after losing millions of bucks in tech stocks that suffered carnage in the markets.
The days of sparse due diligence are over. Investors will look for robust business fundamentals before writing cheques for the start-ups. The propensity for funding will be more for the early-stage start-ups with lower valuations. The growth-stage start-ups need to tighten their frugal belts. Their founders now have to prioritize stronger unit economics, less cash burn and rationalized customer acquisition costs. Talent acquisition for them will be tricky as such start-ups will find it tough to dole out premium BMW bikes and ESoPs or reimburse exotic vacations for their employees. Start-ups can survive the funding winter by learning to sustain on leaner budgets. Cutting the flab and reducing cash burn needs to top their agenda. Until this fund crunch cycle reverses, start-ups will have to extend their runway. Bootstrapping can be a safe bet amid a paucity of external funding. And, to stand the heightened investor scrutiny, start-ups have to go back to the business basics- establishing transparent and resilient business models, beefing up corporate governance, mapping a clear path to profitability and abjuring obscure business practices.
Funding is critical to fuelling the growth of start-ups. Since markets worldwide are facing a liquidity crunch, debt financing has become crucial to meet working capital requirements. A gratifying trend is start-ups tapping venture debt- an alternative source of capital. ‘India Venture Debt Report 2022’ reports that start-up funding through venture debt has nearly doubled in the past year. This trend should continue to ease the Indian start-ups’ dependence on PEs and VCs. Another encouraging factor for the start-ups is the ‘Fund of Funds’ initiative under the ‘Start-up India Programme’. Its acts as a multi-manager investment fund and helps startups by reducing the risk of investing in bonds, stocks and other types of securities. The initial corpus of Rs 10000 crore can be jacked up by the Government given the proliferation of start-ups and the existing fundraising challenges.
India is home to 103 unicorns with a total valuation of $335.80 billion (Source: Invest India as of June 29, 2022). This is a compelling growth story of entrepreneurial innovation and job creation. This funding winter may be a cyclical phenomenon. Nonetheless, it has lessons in caution and introspection for start-ups. Start-ups should not let go of the edge and advantage built over the years. The challenge is not just to survive this winter but to stay agile and navigate the seasons ahead.
(The author is Founder & CEO, CSM Technologies. Views expressed are personal)