Is Funding Winter Pushing 2023 into Sustenance Mode?
VCs will be on the lookout for Cockroach startups with strong fundamentals in the coming tech funding winter
As the recession approaches, the funding scenario is going to cast further gloom on the start-up ecosystem. Going by the signals US Fed is emanating regarding the rate hike, with a probable increase to 5.5% compared to the current 375 to 4% by mid-next year, it is highly unlikely that tech startup funding will witness an uptick in 2023. However, tech funding winter is not harsh on every and any company either. Unlike earlier, Venture Capitalists (VCs) are inclined towards cockroach startups, that can withstand fund crunch and work around, rather than pumping their funds into Unicorn companies, also called billion-dollar startups, as they believe 2023 is the year for companies that can hold their ground by virtue of strong fundamentals. As the tech funding winter is here the cockroaches Vs Unicorn battle heats up.
Cockroach startups, which start from the pre-seed level, do not depend on external funding, but rather channel internal resources even in the face of loss. But this time as it going to be a long funding winter, and will be lasting for 6-18 months and funding diminishing from the peak value of $15.9 billion last year to its current $2.7 billion in the quarter ending September 2022, startups will have a tough time with balance sheets. “There was a definite downturn in Q2 of this year and the quality deal flow had dried up substantially, as investors at large were wary of deploying dry powder,” opines Rushit Shah, Co-Founder of DevX Venture Fund. Therefore, companies would choose conservatism rather than going for innovation, with sustenance as the main tenet, aiming for unit-level profitability instead of adopting finance heavy acquisition path with complete profitability in mind. Clientjoy CEO, Yash Shah says,’ growth at all costs’ has become a thing of past for investors.
Many of the tech startups that received early-stage funding have managed to grow to garner attention of venture capitalists. Shyam Menon, the co-founder of Bharat Innovation Fund, remarks, “We believe that India is well-positioned to work through these trying times.” He opines, most VC funds that are operating in the country are well-oiled and will be on the lookout for favorable opportunities. He says VCs are cautiously optimistic. Investors are abandoning the aggressive approach toward growth and channeling their energies into optimizing the conversion funnels that reduce acquisition costs. “The market will turn eventually and disciplined founders and top talent will reap disproportionate benefits once this funding winter is over. This is the time for cockroaches and not unicorns,” said Rushit Shah.
Cockroach startups, which want to survive have to reset their overall goals, particularly which are in the late stage. These companies which have grown past their success would need new ways of generating cash to keep up with the current business with reset valuation and need to make profits. To some extent, this can be sorted out with slight moderation in moderation and a change in outlook for the company.