Time To Hibernate And Focus On Value Creation Most investors who have been keenly observing the Indian startup ecosystem are of the opinion that this funding slowdown is not exactly harmful for the ecosystem and is the need of the hour

The law of gravity seems to have hit the Indian startup sector as far as VC funding is concerned.

From the dizzying heights of almost a unicorn a week in 2021 to a more sobering and spaced-out expansion of the unicorn club, the startup community has come a long way in a very short time. Termed as the 'Funding Winter', this is a phenomenon that is expected to linger on for another few quarters, and the doomsayers are proclaiming all things bad and scary.

However, is the 'Funding Winter' a boon or bane for the deserving and truly growing startups? Or, does it signify the arrival of good times for the ecosystem?

As an investor who has keenly watched and contributed to the rise of the startup community, here is how I see the current situation, and the future to be.

Getting the perspective right

Most investors who have been keenly observing the Indian startup ecosystem and supporting it through strategic investments, are of the opinion that this funding slowdown is not exactly harmful for the ecosystem. It is the need of the hour for the Indian startup ecosystem.

A lot of people tend to quickly recall the days of the dot com bubble when investors used to put their money into almost any project that had a .com written on the pitch. Internet was a novelty, and web businesses the utopia of ROI that the investors imagined. Consequently, the market grew so fast that it crumbled under its own weight of promise. When the 'overnight riches' didn't come, panic set in, and the bubble burst.

Coming to the current startup ecosystem, it is also digitally-driven, and advanced technologies such as AI, ML, IoT etc are being integrated into every startup pitch. It might very well be the wisdom gained from burning fingers with the dot com bubble that makes some people fear another such occurrence. However, the truth might well be to the contrary.

In fact, I believe this is more about the 'right thing at the right time' as it has arrested the unprecedented and gravity-defying surge. Now, the growth will be more sustainable and substantiated by greater evaluation of business fundamentals and cash-burn.

Essentially, the funding winter means that there won't be any bubble that could repeat the history of the dot-com bubble burst.

The first and foremost thing that might cause a bubble-burst scenario, is the pouring of hundreds of millions of dollars in startups founded by young 'visionaries.' Sometimes, when an entrepreneur pitches to a panel of investors, they tend to look at the big picture and put in the money.

That's something the funding winter will change.

Who gets funded?

VCs, PEs or other institutional investors are all going to move away from bottomless wine glasses that fuelled the drunken funding summer.

In any case, how does a unicorn that has rapidly grown to capture a 25% market share, but doesn't foresee reaching 'break-even' in the near future, benefit the investors?

They will now ask uncomfortable questions -- the ones that most of the startup founders haven't even found an answer to. There will be focus on profitability, and sustainability of the business. Credentials of the founder, principles on which the business is going to be run, the governance team, and clarity about the journey to profitability, are going to lord over market share, number of customers acquired or the turnover.

It is going to be a great time for business founders who are not just looking at getting fuel for the fire, but also seeking investors who share their vision. These are entrepreneurs who would want the investors to work as advisors/mentors and share their own expertise and network apart from the funds to boost the business growth.

Funds are there for the taking

A major misconception about the funding winter is that there is not going to be money on offer for the startups. This is an unpopular opinion and a gross misreading of the ongoing situation. . There are billions of dollars parked with VCs across early-stage, growth or late-stage funds, and they need to invest that money somewhere.

However, the winners in the future funding battles will be companies that show merit through effective execution of their plans and strong business fundamentals. Those that are aiming at just disrupting the market in a zip-zap-zoom manner will struggle, and might face great chill and snowstorms.

Conclusion

Winter is a beautiful season, and a key part of every weather cycle. In the VC and startup ecosystems, the funding winter is a course correction procedure. For companies that are struggling with their cash burn and need a lot of funding to survive, the winter might be harsh. However, if you are an entrepreneur or an upcoming startup founder who clearly knows what to do, how to do it, and how to create value out of it, it is time to get ready for the party!