Startups are bracing for another year of funding crunch and analysts are predicting that layoffs will continue well into CY2023. Anil Kumar, CEO, Redseer Strategy Consultants, shares his views on the subject with Salman SH. Edited excerpts:
Do you see CY2022 as a year of funding slowdown or a funding correction?
Unfortunately, it is both. The federal government began printing money in 2020, and this was practically being given out at almost no interest rate. This has a trickle-down effect on VC investments as well since the cost of investing in new companies came down, making it less risky to invest. At the same time, China had begun heavily regulating its tech and IT industry, which meant these US VCs had to look elsewhere scouting for new investments and that ideal location included India as a priority market. But by 2022, China recovered, and in the US, publicly traded tech stocks began crashing. This meant that VC funding had to stop or slow down. Hence, investors were forced to update their thesis and began pulling back cash. At the same time, tech founders are also unwilling to accept cash at lower valuations when compared to their previous round. So, this stalemate might continue into this year as well.
What are your predictions in terms of funding activity for CY2023?
In the next six months or so, I predict many companies to start nearing the end of their cash runways, hence they might be forced to accept funding at lower or flat valuations. And that’s why we are seeing a lot more convertible-based funding popping up in the ecosystem. By using convertibles, tech founders are sort of able to hold on to the existing valuation at least for a while. But it is essentially a way of delaying what is inevitable. I think the next quarter would definitely be a rather poor one for tech funding and I don’t see a lot of large investments happening. Maybe, after six months, which is Q3 to Q4, of this calendar year, we would see that there would be some uptick.
Why do founders file draft herring red prospectus (DRHP) if they are delaying the eventual listing by more than a year?
IPOs are now being viewed as the next logical step which everyone has to follow to give meaningful exits to their private investors. But for tech startups, an IPO is all about timing; so if you file it at the right time, you will get the maximum outcome. But this means that the company have to be always ready and compliant so that they can hit the market in that right window. Such windows can be anywhere between a week and a few months. That’s why several startups have been filing DRHPs with Sebi so that they can at least tick off the first step…
And can startups fight off valuation correction pressure in public markets if they choose to go public this year?
I believe that there are a few founders who readily accept that they have to take a haircut on their valuation when attempting to go public. And many highly valued tech startups cannot afford to raise any more private capital, hence a public offering is the only way to raise more capital. So in that case, you can probably accept the valuation haircut and if they do well in the earnings and move to profitability, they might be able to go back to where their valuation once was.
Do you expect the layoff wave to taper off in 2023?
When companies were hiring in 2021, they were hiring for a bull market scenario and that was when access to capital was high. Following this, start-ups began executing new expansion plans and investing in a lot of new initiatives. But right now, the markets going on a bearish trend, followed by a funding slowdown. More and more investors are want their portfolios to go for a trim. But this wasn’t the case in 2021 when investors were instead asking portfolios to hit higher GMVs or revenue targets. The race to meet these targets has now slowed down given that the entire market has flipped. So that means a lot more job cuts can be expected this year, which is unfortunate.