Sumer Juneja, partner at Norwest Venture Partners explained how the period of anaemic funding environment will impact different layers of the startup ecosystem in 2016. He believes that companies operating in a disciplined manner will continue to get funded.
Impact of lower valuations
The established unicorns are already out there and even if we see flat rounds or certain mutual funds mark them down, I don’t think they will be significantly impacted. From the environment point of view, if the bigger companies get flat rounds and markdowns the impact will obviously trickle down to the rest of the environment. That’s what is happening and isn’t a bad thing.
The biggest companies get created during the toughest times. Under a disciplined capital, you will create a disciplined company, with the right unit economics and be on the path to build a real company.
How weak funding impacts different layers of the ecosystem
If you look at seed, Series A and reasonably priced Series B, I think those rounds are still going on. If you find a good entrepreneur with a good idea and if he is looking for one to five million dollars, I think those deals are happening. I think the tough environment is on the later stages of Series B or Series C, where the cheque sizes are going to be impacted. The impact will depend on two factors namely, the valuations and the startup’s unit economics.
Leaders in their field, who are doing things in a disciplined manner are getting funded, like Big Basket, Pepperfry, Urban Clap or Swiggys. It will take longer for funds to come and valuations will be tough to maintain, but companies doing things the right way will get funded.
Unicorns are completely different; these are very large companies which have 10-15 investors on their board. They are already market leaders and the battle is won. If you see companies like Flipkart versus Snapdeal versus Amazon, they have very large investor bases and the focus will be on delivering the best customer service going forward.
For the early stage guys, who are raising a couple of million dollars, if you have a good idea and it is differentiated, people will give you the initial money to start off with.
Middle stage startups need to focus on unit economics
For the startups in the middle, we tell them that we have to build real companies. The advice we give them is that going forward, the next round is going to be based as much on unit economics and growth in the country. If I had to invest in a new company that operates in different cities, I would pick the top matured cities where it operates and see if the unit economics is working in those cities. If the startup is present in nine cities and in that whatever it plans to implement in the next five years or four years, I would want to see if they are anywhere close to that in your mature cities.
My advice would be that unit economics is the key, you have to be very disciplined with your cash. Nobody is looking for pan India profitability but take mature localities and cities and give us some proof that this model works.
How do you deal when business models and ideas fail?
If you try to do too much you aren’t going to get anywhere. The large horizontal players have already been established. You’ve got to pick up the niche and got to run with that. One of the questions we ask is what do you not want to do? Let’s not try and do everything. If your niche is food delivery, then let’s stick to that and operate it properly. If you are number one in a market then there is a lot more value than saying I am doing five things and I am not number one in anything.
Startups can experiment and figure out what the budget, but the mother ship should not be impacted. Also my view is that the founder and CEO shouldn’t be spending anytime on that idea much. We should get a team in or get one person like a co-founder or a senior guy to look at it. You cannot take your eyes off the mother ship.
If you are in a situation wherein you are not getting funded and you either need to slow down or shut down, then you can try and figure out whether you can merge your company with someone. If you are sitting on the other side and you want to buy a company, I think entrepreneurs tend to get excited. Mergers are not easy, integration is very tough.
The important decision is to buy a company or spend two-three million dollars to replicate what they are doing. I think the number one criteria is the overlap and what is equally important is who are you adding to your platform.
It’s a complete waste of time when you buy a company and the founder exits early to start another company. You really need this guy if he is coming in as a co-founder and stays with the acquiring company for 5-10 years with a certain commitment.