Mr. Down to Earth
Bansal is of the opinion that funding on the equity side is likely to reduce significantly across sectors
The market is getting tougher given the current macroeconomic and geopolitical factors, such as negative sentiments in global markets, rising inflation rates, tightening of monetary policy across geographies, the Russia – Ukraine war among others is likely to result in a funding winter – resulting in most investors vary of deploying capital in safer investments – this is especially true in late-stage startup investments which are key drivers in a funding cycle.
"As a venture debt player, our primary call will always be driven by fundamentals – given that valuations do play a major role in our underwriting, recalibration with market realities is a must for any fund manager," said Ankur Bansal, co-founder and director, BlackSoil in an interaction with Entrepreneur India.
He believes that according to the current market scenario, it is likely that BlackSoil will shift focus to startups that are profitable or close to profitability and looking at extending runways till the funding cycle picks up that would ensure that serviceability does not get called into question, while also ensuring these startups receive the boost that is required to weather such crises.
"It is imperative to take calls on the best of companies. Hence, companies that have a strong focus on unit economics and profitability will be BlackSoil's first area of focus while also doubling down on its portfolio businesses through actively tracking performance metrics and also conserving cash to support these businesses as and when may be required," added Bansal.
While providing startups with runway until the current down cycle in the market blows over will be key, BlackSoil remains confident in its portfolio calls and will also look at newer investments actively as long as they fit within the robust underwriting criteria set by the VC fund.
"The success of a few well-funded startups had led investors and startup founders alike to grow increasingly comfortable with low margin business models. But the triumph of these selected startups often obscures the debacle in a slew of other sectors. As we are heading into a funding winter, startups are cutting down costs and being cautious about conserving cash. Investors and founders alike have turned their attention to building on the long-term sustainability of the business, which requires an undivided focus on the company's unit economics. Business models that are simply not profitable enough and survive on poor unit economics are unlikely to succeed, even at scale implicating that the growth at all costs is no longer the answer for most start-ups," commented Bansal.
Bansal is of the opinion that funding on the equity side is likely to reduce significantly across sectors. He continues to remain bullish on venture debt being the ideal alternative in lieu of equity to address cash shortfalls until equity raising for businesses becomes feasible.
"Businesses that are cash conservative and have decent runways will be the main calls we take during the year, irrespective of the sector they operate in," advised Bansal.