Navigating The Funding Winter

It is no secret that India is going through a funding winter. Investors are growing increasingly wary of funding startups with dubious business models. Startups are finding it increasingly difficult to continue operations with funds drying up. The worst affected appear to be startups raising Series A and B onwards. Having raised millions with a reduced runway, most startups have begun laying offs. This has led to significant discontent among the masses.

However, there is something larger brewing. Perhaps, there is something larger at play in the VC space.

Has the bubble burst?

It might be an overreaction. But one cannot help but think that the funding bubble has burst. The characteristics of the funding winter mirror those of the dot com burst in 2000. In his book Zero to One, Peter Thiel outlined the reasons for the dot com burst. Investors were throwing money at anything that had the word ‘dot com’ embedded in the name. Several companies in the early Internet era filed for IPOs without a proven business model. The cash burn eventually saw key investors pulling put. This eventually led to massive layoffs.

Does the above sound familiar? In today’s context, it does. Every day, we come across news articles about a startup laying people off. This comes from startups not being able to pay salaries due to the funding winter.

I believe that the days of getting funded with a dubious business model are over. If a company is not profitable, the chances of investment are reduced drastically.

If compared with the events of the dot com burst, one can ascertain that the funding bubble has indeed burst.

What startups can do going forward?

So far, we’ve established that the investment bubble has burst. This leaves the question of what startups do next unanswered. Circling back to Peter Theil’s book, the dot com crash introduced four lessons:

1. Make smaller and incremental steps advances. Steep and hockey-stick growth rates lead to higher cash burn. With VCs reluctant to invest, startups would need to take baby steps.
2. Smaller teams with high flexibility are the way forward. Typically, 80% of funds raised are to pay wages. With a lean and agile team, companies can focus on core team members. As opposed to over-hiring and restructuring later.
3. Monopolistic competition. Most startups believe they’re pioneers in spaces. While they might be, it is important to consider what the USPs of the business are.
4. Focus on products and not sales. This is where Peter Theil and I disagree. But, there is merit to what he says. Products need to be superior to bring in sales. In the case of Byjus, their undoing was mis-selling products. However, it is important to remember that products don’t sell themselves.

What investments will look like going forward?

Put simply, investors look at returns on investments made. Returns made from most startups have been dubious. Unicorns have not given returns people wanted with exits few and far between. Going forward, most investors will look at startups that are making a profit. Or will be making a profit sometime soon.