Investors' Advice to Early-Stage Startups During The Funding Winter In 2023, investments in early-stage businesses have increased significantly. This is a result of tier-I venture capitalists taking a more cautious approach in their search for businesses with good unit economics and the potential to become profitable in the upcoming years.

By Sujata Sangwan

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The startup environment may, of course, be anything but predictable. Headlines at the beginning of the 2022 year discussed the explosive growth of unicorn startups and the staggering amount of funding that flowed to startups in 2021. However, by the summer, startups were preparing for a downturn, and throughout the second half of the year, investment slowed.

A financial shortage is still present in the Indian startup environment. Investors have been hesitant to invest in Indian enterprises as a result of the uncertainties brought on by rising prices, regulatory changes, financial winter, rising foreign interest rates, the impending recession in the West, and the conflict in Europe that has disrupted supply chains.

According to the latest funding report by market intelligence platform Tracxn, the Indian startup ecosystem saw a 75% year-on-year decline in funding in the first quarter (Q1) of 2023. Domestic startups raised $2.8 billion in 301 rounds in the January to March period in 2023, as compared to $11.98 billion raised by domestic startups in 816 rounds in the same period last year.

The ecosystem saw only nine mega deals in Q1 2023 where more than $100 million were raised, against 30 mega deals in Q1 2022. Also, no new company has made its entry into the unicorn club in Q1 of 2023, compared with 14 unicorns in Q1 of 2022.

However, early-stage startup investment has greatly increased in popularity amid this and the current economic climate. One reason is that early-stage investments have a comparatively greater rate of return while still being a safer and wiser decision for investors.

According to Dr Apoorva Ranjan Sharma, Co-founder, Venture Catalysts and 9Unicorns, "There has been a surge in investments in early-stage startups in 2023. This is due to a more conservative approach adopted by tier-I venture capitalists, who are seeking startups with strong unit economics and the potential to turn profitable in the coming years. VCs are also choosing to invest money in their existing portfolios, helping the respective startups grow further."

The funds, investment corpus, and plans made public in the first four months of 2023 are also concentrated on early-stage startups, demonstrating the continued reluctance of investors to participate in growth and late-stage startups. For instance, VC firm B Capital closed a Healthcare Fund I at over USD 500 million; BoldCap announced a USD 25 million second SaaS fund; Capria Ventures marked the first close of its USD 100 million fund; Chanakya Fund Trust launched its maiden USD 12.5 million sector-agnostic fund; Courtside Ventures rolled out its third USD 100 million fund; and Dallas Venture Capital announced the first close of its INR 350 crore fund at INR 100 crore among many others.

But what should early-stage startups during the funding crisis concentrate on? For this article, we asked investors for their 2023 pieces of advice. Read on for their answers.

Early-stage startups should focus on raising multiple small rounds this year to ensure liquidity for a minimum of 18 months or until market conditions improve, says Ranjan, while growth-stage startups must concentrate on building a beta-positive business.

Karteek Pulapaka, Partner, Java Capital believes that funding-winter is likely to continue till at least the first quarter next year. "Hence, our advice to startups has been to focus on improving profitability metrics, achieving stronger unit economics, reducing overhead costs and extending their runways," he adds.

Startups are urged by Pulapaka to concentrate on the fundamentals rather than chasing values. The valuation always follows if the fundamentals are right.

Ritu Verma, Managing Partner, Ankur Capital suggests that this is the time to focus and build valuable startups. According to her, there are a lot of pressing problems, yet the chance to innovate has not changed.

Abhishek Agarwal, Founder and Managing Partner, Rockstud Capital asking entrepreneurs to be creative and come up with innovative ideas that are not just "me too" ideas. "Be as original as possible when coming up with solutions to the Bharat problem. Make sure to burn money in a way that is supported by fundamentals if you must. The enterprises that burn cash are no longer being funded," Agarwal writes.

Startups need to be aware of their costs and consider how they can affect their business, as per Manu Rikhye, Partner, Merak Ventures. "The adoption of value-based principles will determine a company's success. As a result, businesses built on a solid foundation of core principles will attract trust and capital, promoting growth and success. Startups should also keep in mind that a crisis can be the ideal opportunity to create, reset, and bring a laser-like focus to their operations. Startups may come out of a crisis stronger if they remain focused, flexible, and true to their beliefs," states Rikhye.

BoldCap's General Partner Sathya Nellore Sampat advises every B2B SaaS company building from India to closely track their Net Dollar Retention (NDR) metric. According to him, it not only helps you stay on top of potential revenue expansion within accounts and customer churn but it also helps you determine your Ideal Customer Profile (ICP).

Pooja Mehta, Chief Operating Officer and Chief investment officer, JIIF believes that, in today's market, smaller specialized companies have an advantage. "Our advice to founders is to avoid raising funds solely for the purpose of having a cushion. Instead, we recommend focusing on growing the business and building a strong track record during these uncertain times. Demonstrating solid performance can impress venture capitalists and networks, positioning founders to secure investment when the time is right," Mehta highlights.

Sujata Sangwan

Former Sr. Correspondent

Sujata is an engineering graduate and has done her Post Graduation in Human Resource Management. She has a deep interest in startups, venture capitalists & technology. 

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