fundingFund crunch is for real, and it’s adversely affecting a lot of companies today. Investors are increasingly becoming wary of placing big bets on startups.
Private investment activity started on a tepid note in 2016 with private equity dealmaking staying weak while venture capital firms turning cautious on backing startups in the first three months.
According to accounting firm PwC, during January-April 2016, early stage PE investments witnessed a decrease of 57% in value terms and 25% in volume terms. Investors too agree that funding is increasingly getting difficult to come by.
“We are seeing a slowdown but there is nothing to panic. Smartphone proliferation and 4G will create a large platform where big enterprises can be created,” said Rajesh Raju, managing director, Kalaari Capital.
Therefore, the overall focus goes back to the fundamental question of how startups can build scale in a challenging funding environment.
The truth is that slowdown in funding has made competition less intense in many segments of the consumer internet sector as a lot of companies, especially those in food-tech and hyper-local segments, have closed operations. “This gives room for the existing companies to build strong foundations and focus on unit economics,” said Sudhir Sethi, chairman and managing director, IDG Ventures.
Entrepreneurs should go back to their bootstrapping mode, cut expenses, delay capital spending, reduce working capital and explore alternative funding options.
According Paytm founder and CEO Vijay Shekhar Sharma, going for a down round, where a startup raises money at a valuation lower than the previous one, is not bad if a company believes that it has a strong business model.
“The current cycle of venture capital funding that peaked last year was built over five years starting 2010. This kind of a downtrend is good. Otherwise, people tend to forget startups are real businesses. Unit economics has become the key factor for new startups,” said Mohandas Pai, angel investor and chairman of the venture capital firm Arin Capital. “Globally, large companies were built during tough times. Google emerged after the dotcom bust of the 90s and Facebook, post 2008 recession. “In India too, some of the big companies were founded during tough periods. Flipkart in 2008 and Ola in 2010-11 found it extremely tough to raise money,” said Anupam Mittal, founder of People Group.
In such tougher times, entrepreneurs need to be wiser and choose routes that they would have avoided when the going is good. The focus should be on product (business model) and instead of spending big on brand, they have to concentrate on customer engagement. Therefore, in a constrained funding environment, it’s just about unit economics, margins and a healthy path to profitability, not GMV (gross merchandise value) figures that will lead companies to profitability.
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