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The Indian startup ecosystem had an exceptional 2021, with 44 unicorns joining the club. With the surge in 2021 and a $42 Bn investment earmarked for Indian startups, the mood in the ecosystem was upbeat.

Then winter hit the market. According to an IVCA-EY report, private equity and venture capital investments fell 27% year on year to $5.5 Bn in April 2022 due to a slowdown in large startup investments. According to a PwC report,

• During the second quarter of the calendar year 2022, total funding in the Indian startup ecosystem fell by 40%.
• Only four startups made it into the unicorn club.
• In Q2, early-stage deals accounted for 61% of total deal volumes.

With this abrupt global change, startups may be concerned about the bursting of the bubble that many market observers had predicted.

Reasons Behind Slowdown

• Recession in the global economy
• Turbulence in the global markets due to the ongoing Russia-Ukraine conflict 
• Increased liquidity in the markets with RBI scaling up interest rates 

A combination of these factors has resulted in some risk aversion among investors, who have become more cautious. Globally, as the US Federal Reserve tightens monetary policy, the business risk premium has increased, lowering the valuations of listed loss-making startups that may be growth-oriented. This will have an impact on private capital.

As a result, there will be fewer newspaper headlines about companies raising their Series B or C. Most analysts believe that this ‘course correction’ was necessary for startups and that it was bound to happen sooner or later.

Profitability First

Several reports and analyses indicate that the funding winter will last 18-24 months, with a slow recovery, as opposed to the rapid, V-shaped recovery seen after the pandemic.

Despite global headwinds, the IVCA-EY report predicts that overall investment flows in the Indian market will remain strong. Startups should expect tougher valuations, with investors looking for business models that solve problems using technology and have a clear path to profitability. 

Needless to say, the valuations are going to be that much tougher. So you must have crystal clear answers as to when you will break even and begin to profit.

To maintain their growth, growth-stage companies require consistent capital. With a fund freeze, it is critical to keep a close eye on cash burn. This proves to be a difficult task for unicorn startups, prompting them to consider drastic cost-cutting measures such as layoffs. Well-funded unicorns such as Ola, Unacademy, and Vedantu have been forced to reduce their workforce. Several other startups are reconsidering plans to enter new markets.  As startups respond to uncertainty in various ways, now is a good time for founders to rethink their strategy and business priorities before pitching to investors.

The Do’s And The Don’ts 

Here are a few pointers to stay warm and fire up in preparation for the next growth phase as you plan your strategy to combat the cold funding winter.

• Take a look at all of your cost levers. You will discover operational enhancements that will allow you to extend the runway.
• Invest capacity in scalability levers, such as lowering support costs.
• Hire cautiously. Only hire if your company’s growth is contingent on it.
• Develop your product as a “must have” for customers based on their immediate needs.
• If you have a runway of 18-24 months, don’t be afraid to take a chance when you see one. Once the funding winter is over, growth will be valued again, and customers will return with a vengeance.

Overall, the key is to not lose sight of the fact that it is just a colder season and this too shall pass.