Startups Need a Plan To Brave the Funding Winter
According to Krishna Vinjamuri, partner, Kae Capital, startups need to figure out how to achieve strong unit economics and limited cash burn to grow meaningfully during the current funding winter
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A startup is born when an entrepreneur takes the first leap of faith, but its flourishing relies on another vital leap—one taken by investors. Kae Capital, a Mumbai-based early stage VC fund, was founded in 2011 by Sasha Mirchandani to help entrepreneurs build large companies even from a conceptual stage. With over a decade's experience as an early-stage tech investor, Krishna Vinjamuri joined Kae Capital as partner earlier this year, just as one was beginning to hear whispers of an impending funding winter in the Indian startup ecosystem.
Reviewing last year's scaling trends when funds were abundantly available, many are now blaming startups for rashly targeting swift growth and ignoring poor unit economics and high cash burn. Disappointed with their then short-sightedness and current lack of profitability, investors are now exhibiting reticence when it comes to funding startups, especially late-stage ones. Or so the mainstream narrative goes.
According to Vinjamuri, though, investors are just returning to the normal course of business after the previous fiscal featured an unusual peak of capital deployment: "2021 was an abnormal year where many investors chose to invest large amounts of capital in a narrow period of time."
He posits Kae as rather a black sheep in this context, stating that the fund has been a bit cautious in 2021 and made very few investments. "The current market will help us provide sufficient time to have a meaningful dialogue with founders. Likely, we will make more investments in 2022 than in 2021," he says. In fact, the VC fund does not find much reason to recalibrate its valuations, considering them reasonable as it looks forward to making new investments in eight to ten companies this year. "Companies that showcase strong unit economics and limited burn while maintaining meaningful growth are likely to close rounds earlier," Vinjamuri says with regards to the fund's investment plans, adding, "Most of the other startups have to work on a plan on how to reach there."
Having said that, he seeks to temper the significance of unit economics and profitability, which have of late become important concerns among investors, with a touch of realism, explaining, "When you are starting from scratch, you need to invest to build the tech product, team etc. At this point, you may not have the margins that you can get at scale. So, for a large set of business models, it is not right to expect profitability or positive unit economics from day zero. At an early stage, we are looking to build conviction that there are reasonable drivers for unit economics and profitability to fall in line as the company scales." He concedes though, "There are some successful entrepreneurs who have pulled this off from day zero."
As for the funding crunch facing the startup sector at large, Vinjamuri offers on a cautionary note, "The gap in demand and supply for funding will be more glaring in Series B and above stages. Investors will take time to understand the business and the risks they are underwriting before making decisions."