What can we learn from the current Funding Winter?

In the last 2-5 years, Indian startup ventures received millions of dollars in funding. In 2021, the Indian startup ecosystem raised almost $42 Billion and gave rise to 42 new unicorns. However, in the first quarter of 2022, Indian startups collectively raised close to $10.1 billion, compared to $6.9 billion in the second quarter, a quarter-on-quarter decline of 33%. Many angels and VC funds have put a halt to their investment in the last 2-3 months. As alarming as this is, the steady decline has now been termed the Funding Winter.

To understand what is happening in India, we shall examine briefly, a similar crash that has happened in the past. The current startup crash relates to the dot-com bubble that occurred in the United States of America during the 1990s. During that period, computer penetration in the United States started reaching extraordinary levels and the market grew by 100% every 2 years. Millions of people in the United States started having an internet connection for their computers. Similar to how internet companies were flooding the United States markets, today we have startups popping up from every corner of the country.? However, since most of these US companies were website-based companies, they had a dot-com suffix attached to their name, just like how every other startup in India is raising millions of dollars today. Back then investors were so bullish on dot-com companies that a company would receive funding even if they did not have a sustainable business plan or a product.?

When a high volume of money was poured, it brought to light the following:

• Unjustifiable valuations: Every other startup started commanding a million-billion dollar valuation which could not be justified.?
• Public Companies: Many of these companies launched their IPO and saw record-breaking openings making investor sentiments become even more optimistic.
• Profitability: Barely any of these companies were profitable and performed cash-burning activities.?
• Growth at any cost: Investors funded unsustainable business models with a philosophy of growth at any cost

In 2001, just like any other bubble, when investors realized their profits were about to take a downturn, they started pulling out their funds/ diluting their equity from these startups one by one and the market started crashing. Within a few weeks, the US stock market went down 10% and what happened next is, even today, known as one of the darkest times in the US markets. All the million-dollar funding started to dry up. As a result, thousands of employees were fired to cut costs for hundreds of startups (relate the same to the recent lay-offs by Indian startups). These startups went bankrupt and in total, the investors lost $5 trillion of wealth in just 2 years. This was the result of the dot-com bubble. Insightfully, the very same dot-com bubble that actually wiped off so much of the investors' wealth also gave rise to incredible startups that turned now into industry mammoths like Amazon, eBay, and even Google.?This convincingly displays the massive opportunities that can be captured to become industry leaders during such crashes or as we call it today, funding winters.

Let us now understand what type of companies went bankrupt and what killed these companies.

• The companies who actually did not have a product-market fit
• The companies that lacked an innovation arm to capture the greatest opportunities within their capabilities
• The companies which did not have a unique selling point
• The companies which spent way too much on unnecessary avenues like investing in unviable channels or marketing streams
• Higher CAC - Customer Acquisition costs
• The companies who fell prey to regulations and adverse market conditions

In our opinion, based on these historic and similar events, the aforementioned types of companies that have failed will fail in this and every other startup revolution to come.?

The perturbing question is that as an investor how does one filter what kind of startup will succeed today and more importantly if you are a Founder then what are the elements that the investors will consider before they invest in your startups today.?

The most important factors that a company must focus on are:

1. Profitability?
2. Innovative edge
3. Entry Barrier in the market
4. Viable Customer Acquisition Cost.

Since the beginning of 2022, the Indian startup ecosystem has seen similar conditions where the investors have reduced the funding received by the startups. The first effect of this startup crash has been laying off employees to reduce costs. Lack of innovation audit whilst investing in return of some equity did not turn out to be a good return on their investments.

Today’s ‘best practices’ lead to dead ends; the best paths are new and untried - Peter Theil

At Apex Hatchers, we not only enable innovation for businesses/ ventures but provide innovation audits to Investors for their portfolio investee companies in order to determine the innovation scope and ascertain if the innovation scope is being maintained by the organization. Moreover, to discover and capture the greatest opportunities in their sector.?

For more details on our innovation audit services contact us at [email protected] or [email protected]?