BENGALURU: “There are great responsibilities on the part of the entrepreneur to act responsibly in this environment, which means letting people go, reducing your outflow of money. The days of 50X revenues are gone...The most important commandment for start-up founders, managers and investors- is to survive,” said Jonathan Medved, founder and CEO of OurCrowd, Israel.
Addressing start-up founders at the India Global Innovation Connect, Medved, the CEO of online global venture investing platform, said, now is not the time for wild spending or wild expectations. “If someone’s offering you a term sheet, and it is not exactly what you were dreaming of, it’s okay, survive,” he said.
The serial entrepreneur and venture capitalist said that we are in for a cyclical change and historically, these take a couple of years to work themselves.With massive layoffs, restructuring operations, funding crunch, lower valuations, shutting down non-core verticals and reducing marketing spends, start-ups that enjoyed the higher valuations and blockbuster funding last year, are now gearing up to face strong headwinds.
With Central banks across the globe tightening their purses and withdrawing easy money policies, start-ups see a massive drying up of funding in the coming days.The signs of some of this drying up has already began to show. Private equity investments recorded $3.6 billion across 138 deals in April 2022. According to Grant Thornton Bharat, the values dropped by 52% compared to April 2021, owing to absence of big-ticket investments.
Edtech unicorn Vedantu, which laid 424 employees, is expecting fund shortage in the coming quarters. It said capital will be scarce for the coming quarters. Many start-ups such as Unacademy, WhiteHatJr, Cars24 and Meesho, among others, have laid off citing capital crunch as one of the reasons.Venture capitalists and start-up founders have warned their employees about the change in the coming months, and VC firms too have slowly cut down their investments.
Start-up accelerator Y Combinator in a note sent to founders said that no one can’t predict how bad the economy will get, but things don’t look good. “The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days,” it said.“If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan,” the note said.
Late-stage funding blues
What exactly is happening in the start-up space? Raising capital is always a task. And once the start-up is able to get a VC on board, it starts burning the dollar bills like anything and becomes over-dependent on the VC. “This eventually makes them land in a situation where they are not in a state to raise funds in the next round. And without cash, there are only 2 scenarios possible for a fresh venture i.e., either acquisition or an exit from the market,” explained Ranjita Raman, CEO of Jaro Education, an edtech firm. Though at present, many early-stage start-ups are raising funds, VCs have cut down funding for late-stage start-ups.
Late-stage deals saw a downfall in the total value from $7.68 billion in Q1 2022 to a low of $2.96 billion in April-May 2022, according to the CEO of Jaro Education.“Late-stage deals witness a good value flowing in for rapidly growing companies. And when these deals slow down significantly then it gets reflected in the whole ecosystem. Investors are now sceptical to bet on start-ups when there’s no competition for deals in the market,” she said.
In 2021, India reported a whopping 44 unicorns with a total valuation of $93 billion. Compared to last year, only one start-up has entered the unicorn club in the last two months. The slowing economy and drop in listed space have made investors to hold on investment resulting in slack in funding.According to Anil Joshi, managing partner, Unicorn India Ventures, as such there is no crunch, just the market corrections have made investors hold on to investments. The same will be corrected with improvement in the economy.
Stay afloat is the new mantra “The economic downturn in 2017 has taught many lessons to start-ups hence this time without wasting much time most of the start-ups have taken corrective measures to elongate their sustenance in absence of new funding,” Joshi added. Many start-ups are holding on till the new funding cycle kicks-off, and staying afloat seems to be the new mantra among them.
Start-up insights
According to CB Insights, global venture funding for start-ups will decrease by 19% in the second quarter of this fiscal
Late-stage deals decreased from $7.68 billion in Jan-March 2022 to $2.96 billion in April-May 2022
Many start-ups are struggling to close fund-raising rounds due to lower valuation
Zepto was the only start-up that managed to raise $200 million in May
GreyOrange, Ather Energy and Country Delight managed to raise between $108 million and $128 million
Last year, 44 unicorns were added with a total valuation of $93 billion