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Businesses built on strong fundamentals will continue to get funded, industry says

Businesses built on strong fundamentals will continue to get funded, industry says
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Tripping valuations of unicorns might have set a dull tone for startups this year, but many industry experts believe that companies that are doing things “the right way” will continue to secure funding. Companies like Big Basket, Practo, Car Dekho, MSwipe and Urban Ladder have continued to show progress in their respective business models in spite of a weak environment.

“Series C/D funding and beyond should ideally happen when the business has clearly established a business model with fundamentally strong unit economics and/or there is very clear category leadership. In that scenario, the capital is rightfully deployed in scaling up a proven model and taking the company to profitability. Companies that are achieving the above should raise capital on their own terms and will also likely get funded at good valuations,” Rajat Agarwal, an investor with Matrix Partners told Entrepreneur Media in an e-mail.

“Markdowns become a reality when companies were able to raise too much capital at sky high valuations without proving that they have a sustainable business. Essentially they are at 1-2 stages behind in terms of business growth and key metrics than where they should have ideally been to justify the valuations,” Rajat added.

Prakash AdvaniCanonical's Regional Director, Sales & Alliances – India & South East Asia said that companies should raise capital as the last resort. If they can quickly convert their ideas into a profitable business then they don't need to give up on equity. 

Participating in a panel discussion on “Building scale in challenging funding environment” at Tech Circle summit in Bengaluru last week, industry experts spoke about how startups could build sustainable business models amid the down rounds in the funding.

The panel consisted of Meena Ganesh, co-founder & CEO Portea Medical, Sumit Gupta Group President and Country Head - Retail Banking Assets Group, Yes Bank and Sudhir Sethi Founder, Chairman & MD IDG Ventures. The panel was moderated by Rajesh Raju, MD Kalaari Capital.

Keep going back to the consumer, understand what they need, model your business around it, do a lot of work to keep the customers engaged, those models will continue to succeed and will drive a lot of progress, Portea Medical’s Meena said.

No panic for fundamentally strong businesses

So long as the fundamental model works there is absolutely no issue and we do see that both funding and business is available, Meena added.

We are seeing a slowdown but there is nothing to panic. The Indian macro is better than ever. In addition to that the tech macro the increasing internet usage, proliferation of smartphone volumes and 4G will create a platform for enterprise companies to be built, Kalaari’s Rajesh Raju said.

The recent shutdowns across the food-tech and hyper-local space has helped cleared the chaff and enabled the maturing of the ecosystem. The panel said that investors are now questioning companies around unit economics, path to profitability and even on reaching EBITDA positive.

“This gives room for existing companies to build companies on strong foundations and focus on unit economics,” Sudhir Sethi of IDG said.

Now with the correction that has happened it is possible to now build teams, resources at a lesser cost than a year earlier, Meena said.

Mid-sized startups to gain?

“Money in the bank is quickly wasted if the business fundamentals aren’t right.  Real sustainable businesses don’t continue to give deep discounts and cash back, often losing money on every customer order,” Brett Stevens, VP at Jaarvis Accelerator told Entrepreneur Media in an email.

“We see an interest from investors in mid-sized startups that have proven their product / market fit, have built some traction with real paying customers, and have started to scale.  Recently we’ve seen investor interest return to the more traditional market sectors, including education, HR and healthcare, plus a focus on some new areas such as waste management and renewable energy,” Brett added.

Edition: October 2016

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