The billions are now millions as the startup financing situation has slowed down from the peak of 2021 to a less tense scenario in 2022. The total amount of venture capital financing in July this year shows the drop, since it was $652.7 million, compared with $2.7 billion during June.
2021 was a year that saw the influx of capital pouring into Indian startups that saw more than $38 billion being poured into the ecosystem, as well as the rise from more than forty unicorns. It was also a time where venture capitalists were afflicted by FOMO (fear of not being able to participate).
A venture capitalist on the terms of anonymity, explained, There were deals which were completed in only three days, whereas due diligence on a new investment can take at least three to the span of four weeks.
There has been an entire turn around in the situation with a dramatic decrease in funding during July. This trend is expected to continue through the remainder of the year. In this situation startup companies are becoming cautious by limiting spending and cutting costs through reductions in staff. They are also struggling to find new capital.
Venky Harinarayan Director, Rocketship.vc says, Now there is a shortage of capital with the an investor bar that is higher. We are at a point of transition and it’s difficult to predict what the future holds.
With this new environment that has been created, the needs for investors as well as their approaches to financing of startups have changed. Business Headers talked to an array of venture capitalists to learn the most important trends in the present and in the future.
Deal closures take time
During the period of high funding of 2021, startups were typically closed within days, due to the factor of FOMO at play. The normalization has taken over as early stage deals and especially the angel sector that can take a month or as. Growth stage deals, which include greater sums of money take months to conclude. The focus is on a thorough due diligence for startups.
Adith Podhar, Founder, Gemba Capital, says, There isn’t any FOMO for investors today and it was apparent in 2021. They are not in a hurry to conclude the transaction. Additionally, there isn’t any pressure on them to complete an amount of transactions.
Prioritize early-stage funding
The recent funding freeze hasn’t affected this flow of money into early stage startups , as investors continue place bets on companies that are innovative instead of letting go of potential opportunities. The hope is that when the tide changes and investors are able to take on greater likelihood of success.
Ankur Mittal Co-founder of InflectionPoint Ventures, an angel investing platform, says A rapid growth and scaling of startups of the first generation occurred in 2021. The investors and the whole ecosystem generally were pleased. 2022 has seen the emergence of a few deals that are high-quality however, they are less numerous and demonstrates a robust recovery post-COVID-19. The high-quality startups have also piqued the interest of investors.
Entrepreneurs at the beginning of their growth, specifically those with a the Series A plus, will face difficult to raise funds because it will require more money.
The boom in 2021’s funding was focused on the growth indicators of an entrepreneur, but today the focus is shifting towards sustainability. The questions are now being asked regarding cash burn, the path towards profitability, and the process of building an enterprise that can be long-term sustainable. Before, the business was all about growing at all costs that naturally resulted in investing large sums of money in order to attract customers in order to expand their market share.
In addition, due to the quick accessibility to money in 2021 the startups were not necessarily focused on saving cash. Nowadays, it’s all about increasing the runway in terms how much money is sitting in the bank account, in order that it lasts for at most a couple of quarters.
V Balakrishnan Co-founder of Exfinity Venture Partners, says, B2C startups could see an increase in their valuations, as well as there could be more attention paid to their model of business. B2B startups are fairly stable due to their lower costs of cash.
A lower value
Startups could now be required to seek capital at a lower valuation or an even round. This could result in an adjustment in the value of startups, particularly growing-stage startups. This is also a consequence of the correction happening in the market for public securities. The valuations for certain segments, that were typically determined to be 40 times revenues of the company, might not be practical at this moment.
The bleak economic outlook in 2022 has turned around on the type of interactions founders have in their dealings with investors. The founders of 2021 enjoyed an advantage against investors driven by FOMO. Now, founders require the support of their current investors to make it easier to navigate through the current market. This could result in more urgent capital to ease the pressure.
Amit Kumar, Partner, ah! Venture Partners, an early-stage angel investing platform, claims, Startups are now looking at the possibility of a bridge round of financing to expand their runways and will be looking into large capital raises after the demand comes back.
The quality of the founders
The success of a company and its founder are now making all the difference to the investor community. At one time, me-too-startups received funding, however this might not be the case now since capital is difficult to come by. Only those who have the right qualifications are now getting funding. Because of the increasing emphasis on the due diligence method, the standard has definitely risen for founders to secure money in this current climate.
Questions marks on exits
The current economic climate makes it challenging for both startups as well as investors to make an exit. The high valuations for 2021 aren’t likely to become the standard for investors and startups today. The founders will have to wait for their turn before they launch another round of capital since any move in this direction would result in funding at a lower valuation, which will not be acceptable to current investors or founders. This could result in an unbalanced valuation and M&A deals failing.
Balakrishnan who is from Exfinity Venture Partners believes there might be a change in the value of the net assets of the VCs with respect to their investments in startups next year.
New areas of investment
There is a lot of debate about what the future of investments holds in the future, particularly given the negative developments occurring in areas like NFTs and cryptocurrency. Some investors think that investing within these fields will go down, while others believe they’ll continue to rise.
Ankur at Inflection Point Ventures says, A number of technologies have been attracting attention since 2022, such as NFT and blockchain. Despite the uncertainties surrounding them entrepreneurs are investigating these technologies and investors are more attracted to these technologies.
Despite the so-called”financial winter however, the medium-to long-term picture that is the Indian startup scene is extremely solid. It is unlikely to last for very long, and it is expected that things will begin to turn around in the first quarter of next season, or even sooner however, one may not be able to see the big boom that 2021 will bring.
Adith at Gemba Capital says, The deal activity is coming from the sides of investors after they took their first step back. There’s plenty of dry powder for capital.