Funding winter pushes startups to focus on profitability

If you are struggling to understand the crushing impact of the funding crunch on India’s startups, all you have to do is zoom in on one tiny factoid: Asia’s third-largest economy produced a single unicorn in the first two months of the current financial year.

The country saw 10 startups enter the coveted club of firms valued at one billion dollars or more during April-May 2021.

That is making many industry watchers wonder if the glory days of unending funds pouring into Indian startups at exorbitant valuations were behind them.

Funding for Indian startups – especially late-stage funding – is drying up. Only $2.92 billion have been raised by startups in April and May 2022, versus $4.07 billion in the same period last year. While the overall funding dropped 28%, late-stage funding – which happens at a more mature stage in the journey of a startup and is crucial to fund its ambitions – plummeted 54%.

The funding winter is forcing a correction in startup valuations and making investors shun startups without a clear path to profitability. It is also forcing startup founders to rearrange their priorities before pitching to potential investors. It will also separate the haves from the have-nots.

“The kind of startups that have not raised much money but have good quality revenue might not see a lot of correction. Companies solving real problems using tech are expected to grow faster,” said Anil Joshi, Managing Partner, Unicorn India Ventures – an early-stage investment company.

Joshi urged startups who raised a lot of money in the past but had not yet developed a decent revenue model to use their resources well and cut costs through layoffs and other means.

Others agreed.

“This is a much-needed correction and reality check for all the tech startups,” said LogiNext founder and chief executive officer, Dhruvil Sanghvi. “A startup's job is to build a profitable business, and not to raise funds.” LogiNext provides a software-based platform to help businesses manage their logistics.

Industry watchers said the trend was driven by global cues and could be temporary.

“Last year, funding was available for a very good valuation. A lot of companies were setting up new departments, entering new geographies and trying out a lot of experiments. Money is not available at the same valuation this year due to the absence of a bull market,” said Amit Nawka, Partner, Deals & Startups Leader, PwC India.

Industries like edtech have been worst hit by the funding crunch.

“During the pandemic, a lot of edtech startups started mushrooming, and nothing can be built overnight. Some of these businesses were not well thought out,” Jaro Education chief executive officer Ranjita Raman said, adding that hiring brand ambassadors couldn’t change anything overnight. “We, at Jaro Education, have been core-business focussed, keeping EBITDA in mind, since our inception.”

Edtech, transport aggregators, and e-commerce companies have been worst-hit by the funding crunch and have started laying off employees, especially in roles that can be automated or are not customer-centric, said Yeshab Giri, Chief Commercial Officer - Staffing & RT Professionals at staffing firm Randstad India.