The Exit Multipliers are Changing

In an exclusive interaction with Entrepreneur India, Subrata Mitra, Partner at ACCEL shares his perspective on the future of funding.

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Is it going to get tougher in the days to come for startups seeking investment?
There has definitely been a reset in both valuations and investor expectations, more so in the US than in India currently. Early-stage investments are still fairly normal in India. But moving with caution appears to be the norm, at least among larger investors who were previously writing fairly large cheques. If the situation continues, medium-stage companies will be affected next, followed only later by startups in the early stage.

As an investor will you be recalibrating the valuations?
Actually, it depends on a lot of factors. Clearly, the exit multipliers are changing. Companies closer to pre-IPO may converge more to public market multiples, but the early stage still has a lot of room. I think each investor is going to take their own approach to new investments.

During this time of crisis, what main categories would you like to fill in your portfolio?
More than a specific category, this is a good time to be in the early stage, which is Accel's home ground. If you are able to raise a round in this environment, you get better access to human capital and can actually build the company under the radar without needing to worry about what happens in a heated market. So far, most of our companies are in that building stage. So it's a great time for them to hunker down and focus on building their team and product.

Across what stages do you think funding would be tough?
We don't expect to see the really large, several hundred million dollar cheques at the same frequency as last year. But early stage companies won't be affected that quickly. For companies in between, it'll probably be something in the middle.

As an investor, are you conserving cash to invest only in the best companies or advising the same to your startups? What kind of companies are likely to get invested first?
At Accel, we've always advised our startups to be prudent and frugal with their expenses, and we continue to do the same. This has become the de facto DNA anyway. But naturally, we are asking our companies to make sure that they have a long enough runway so that they don't have to go out to the market too quickly, given the overall funding environment. Outside of that, we should continue to do whatever we were doing before.

Will there be more bridge rounds and less of newer investments?
The best companies will always be able to raise money. We will probably see more bridge rounds.

When burn and runaway become an issue among your portfolio companies, what measures do you take?
There's always only one rule: We do whatever is right for that business. If the company is in line of sight to become profitable, we encourage them to look towards that. For a company that is very early, the burn is relatively less, so we should be able to figure out a way to extend their runway. There are a few special situations with large burn and no line of sight to getting to break even. In those situations, perhaps the entire business model needs to be relooked at. But again this depends on the business and what it needs to grow and thrive.

Why are investors and startups focusing on unit economics and profitability now only, isn't that a basis of business?
I think the best startups are always focused on unit economics. That's how they should always be. When the markets become aggressive, and there is a lot more capital available, founders think it's in their best interest to go grab that capital. But as soon as things get harder, good founders start thinking about and figuring out what the right thing to do is. And more often than not, they get there quickly.

ACCEL
Subrata Mitra, partner, ACCEL