Winter is coming. This oft-quoted line is the name of the inaugural episode of the widely-watched series Game of Thrones that first aired in April 2011. It is also a dialogue used liberally throughout the series’ long episodes that describes an impending bleak outlook. So profound is its use that it has attained almost cult status in popular culture. But currently, the statement holds a special significance in the world of business as it very aptly captures the upheaval observed among start-ups in India amidst their constant lay-offs and valuation woes.
Inviting this scrutiny is the listing of some of the high-profile start-ups on the bourses in the latter part of last year, following which their valuations fell drastically. It has also prompted many start-ups planning public market debuts to reconsider their plans, and postpone their listing indefinitely, for now.
While unicorns and soonicorns—firms soon to become unicorns—are having a tough time, there is an interesting, and somewhat contradictory, trend emerging in the early-stage start-up arena. Despite challenges, early-stage start-ups and angel investors are carrying on with a ‘business as usual’ attitude and ventures are raising funds when required.
If the number of funding rounds is anything to go by, last year was one of the best for early-stage start-ups and their investors. Data from Tracxn—a platform that tracks start-ups—shows that a total of 2,441 rounds were concluded in 2021 if one takes into account angel-, seed- and series A and B rounds.
In the current year till June, over a thousand rounds of investments have been made, and seed rounds account for the largest chunk at 647, followed by series A at 202.
In terms of the quantum of money, early-stage start-ups raised a record $8.4 billion last year, while over $5.4 billion has already been raised till June this year, data from Tracxn shows. Meanwhile, the total amount of funding raised by all start-ups in India till July this year is $18.6 billion. Last year, the total was $41.6 billion.
Even as the total number of funding rounds till June this year is half of last year, the quantum of funds raised has already surpassed 60 per cent of the money raised in 2021. It shows that the average deal size of $5.3 million this year is higher than last year’s average of $3.4 million.
Incidentally, angel investors and founders of early-stage ventures believe that while the going is still comparatively smooth in the early-stage arena, there is indeed an enhanced level of scrutiny on start-ups. Factors such as business models, scaleability, and the seriousness or track record of founders are being analysed much more comprehensively when compared to a couple of years ago.
A learning curve
Dhianu Das, Co-founder of angel network Agility Ventures, says that not everything is dark and dreary in the start-up ecosystem. According to him, although many in the start-up ecosystem are talking about a funding winter, Agility Ventures has witnessed continued scaling of most of the start-ups in its portfolio. “Our focus on early-stage investments, and rigorous filtering has borne well for our portfolio as start-ups solving real-world problems and providing greater value for customers continue to scale and attract capital,” he elaborates. The angel fund has 35 companies in its portfolio, and plans to deploy around `450 crore by 2025 with a sizeable chunk marked for investments in the current year.
Echoing Das’s views, Apoorva Ranjan Sharma, Co-founder of angel investing platform Venture Catalysts, says that he has not witnessed any slowdown in funding, and instead doubled his investments in start-ups by closing 207 deals, and investing in 178 of them in 2021. “The momentum is intact even in 2022. We expect to close the year at 300 deals. Funding winter is a cycle, and there are lull months. But that is not reflecting [on] the growth of the entire ecosystem. Some of the sectors might be under pressure, and that is normal,” is how Sharma explains the current turmoil.
Incidentally, government data shows that nearly 75,000 start-ups registered in the last six years in India, and they have become quite important from an economy perspective by creating more than 750,000 white-collar jobs.
But Manu Rikhye, Partner at early-stage fund growX Ventures, says that it is not just a numbers game for start-ups. Rather, they are more interested in testing ideas, and solving problems without losing focus of the unit economics. “The start-up ecosystem in India is climbing the learning curve, and there will be some separation of the wheat from the chaff. The hype around unicorns/soonicorns is slowly being replaced by an appreciation for problem-solving, perseverance and talent,” he says.
Under the lens
Even as bigger start-ups battle the chill of winter, early-stage start-ups may never know what winter feels like. But that has not stopped venture capitalists (VCs) from putting early-stage start-ups under a microscope, despite understanding the wider macro trends weighing on them, says Bhavik Vasa, Co-founder of revenue-based financing start-up, GetVantage. “While there is a strong appetite for investment, and usual cheques ranging up to $10 million are still being written, the VCs are negotiating hard around valuations; doing more follow-on rounds; asking founders to prioritise profitability over growth; and even pivoting to more profitable models,” says Vasa, whose start-up recently raised around $36 million in a strategic growth round through debt and equity.
This assumes significance as profitability is a rare occurrence in start-ups, and even some well-known ventures come with huge losses, as a result of which metrics like gross merchandise value (GMV) are commonly used to justify their high valuations. Incidentally, when well-known companies like Zomato, Paytm and Policybazaar listed on the bourses, the phrase, ‘path to profitability’ was freely bandied about on Dalal Street to pitch them to potential investors.
“In early-stage ventures, there are enough white spaces that provide ample opportunities for founders to create a mark. For soonicorns and unicorns, the path to growth means to have a hold on the bottom line. It is imperative to cautiously burn [cash], and focus on gross profits,” explains Das of Agility Ventures.
In a similar context, Vardhan Koshal, Co-founder of Tortoise, a start-up that facilitates saving for large future purchases, believes that it is more about valuation, and less about the funding stage of a start-up. “It would be near impossible for start-ups to raise money at the same [higher] valuation as last year, given everything else remains equal. By this logic, raising funding at the ‘corrected’ [lower] valuations now should be easier,” explains Koshal.
Vasa of GetVantage believes that start-ups that have not been mindful of hiring practices and growth are going to be affected deeply, and they will need to take measures such as mass lay-offs and cutbacks to keep abreast of the challenges.
That’s not all. Vipen Jain, Co-founder of a plant-based health and wellness start-up Fitspire, feels that investors are hesitant to invest at an early stage as the fear of failure is high, but things are starting to look up slowly.
Tanul Mishra, Founder of Bengaluru-based fintech-focussed incubator Afthonia Lab, sums it up nicely when she says that while early-stage start-ups are seeing capital flow in, late-stage ventures are facing challenges in raising funds due to their massive valuations. “This is the time we will see great start-ups come out, and showcase their strengths, which will help India to develop a better entrepreneurial ecosystem,” she adds.
It may not be winter yet for early-stage start-ups, but if they do not learn from the actions—many call them mistakes—of their larger counterparts, winter will soon be upon them too. And it may last much longer than expected.
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