Never waste a good crisis!

"In the depth of winter, I finally learned that?there was in me an?invincible summer"

It is scorching hot out there under blazing sun but winters have set in. Or at least that’s what the experts say. The world is a different place than it was 100 days ago, specially for the startups. The massive layoffs and dwindling funding on the back of a war, inflation, increasing interest rates and consequent liquidity crunch have announced the onset of the Indian ‘startup winter’.?

This comes after two years of skyrocketing valuations and fundraising which by the way was an abnormal period built on irrational exuberance. Let’s say that again for effect - 2021 was irrational, it won't be repeated. Compared to what happened in last year, every season would be a ‘winter’ of a sort. So we better get used to it.

But is the current situation really bad for the overall ecosystem? May be not.?

Early-stage startups have always struggled to get initial investment. One report suggested that only 1.5K out of around 2 lacs startups get funded at this stage which is an abysmally low number. Even at peak of summer, the investments in these zero-one startups were hardly anything to write home about. For such young startups, angel investors, networks & accelerators continue to be the best bet. So they don’t need to get too despondent about the gloom & doom. Their struggle continues to be the same.?

But yes, it is the late-stage companies who will be experiencing the most pain as is evident from the layoffs. Public-market companies are down 60% or more, and they tend to be the leading indicator of how VCs are similarly going to value startups down the road. That means these startups are going to need more revenue to get back to their last valuations. “Flat is the new up”. It is not my case to say that late-stage companies deserve to be penalised. But if the cost of capital is low, stupid decisions do get taken & they were. There will be no shortage of bad news for few months at least for these well-funded entities.

But in every crisis lies the seed of opportunity. Now is as good a time as any to get some common sense back in the frothy valuations game that was being played out there. If your business model is shaky & there is no clear path to profitability, public listings won’t help you as it happened with PayTms of the world. And increasingly even the private market won’t help you either as was the case with Grofers. A quick recap - Grofers has raised a total of $670 Million in equity funding. It was acquired for $570 Million. That's 14% less than the capital invested in the company during the course of 9 years of its existence.?

It once again makes me appreciate & applaud bootstrapped businesses running with positive fundamentals. My respect for Zerodhas & Zohos of the world has gone up by a few notches. As one wise gentleman who goes by the name Warren Buffet once said that it is only when the tide goes out do you discover who's been swimming naked. And unfortunately, a lot of them in Indian startup ocean have been caught exactly in that embarrassing position.?

In the long-term, this overall setback bodes well for overall health of our ecosystem. Value creation & not valuation would and should become the focus again. It is healthy if VCs are starting to demand that companies demonstrate more robust revenue & unit economics. It is healthy if money flows in right businesses. We have had too many Consumer facing startups - there is absolutely no need for another 10-minute delivery startup or another D2C brand. Such recession should force the money to go into those sectors which are better insulated from macroeconomic headwinds and are more sustainable e.g. B2B, Enterprise software; AgTech etc.

This winter won’t last, the markets will revive, the summer will be back. Several marquee investors have closed significant funds in the past 18-20 months and have enough capital to fund startups for the next 2-3 years. They are sitting on too much capital which has to be deployed. So yes, sun will be out soon for the startups. But hopefully the lessons that we need to learn from this episode won’t be forgotten. A reset is in the making. That might not necessarily be a bad thing.?