According to JM Financial, the current funding winter is acting as a driving force for Sequoia-backed startups to focus on capital efficiency
The brokerage said that most of Sequoia's portfolio startups are setting targets for operating profitability and discussing metrics like profit after tax (PAT) and cash flow
While these startups are looking at a large and expansive TAM, they are also heavily focused on the right customer segments: JM Financial
Several Sequoia-backed unicorns and soonicorns are engaged in the groundwork to go public as soon as the market sentiment turns positive, JM Financial said in a recent research note.
“Considering the novelty of their business models, the companies are looking to engage with public market participants to generate constructive feedback while keeping a close eye on any listed companies with a relatively similar business model,” the brokerage said.
After interacting with Sequoia’s major portfolio companies, including CRED, Dailyhunt, Meesho, and Gupshup, in an event hosted by the venture capitalist major, JM Financial concluded that the current funding winter has acted as a driving force for the startups to focus on capital efficiency.
“It was evident that the current funding environment and the reaction of public markets since the beginning of the current rate hike cycle has resulted in a heightened focus on capital efficiency. Companies have paused or terminated (wherever applicable) all initiatives with a long and uncertain gestation period for return on investment and are also being remarkably upfront about their profitability potential and timeline,” JM Financial analysts noted.
It is pertinent to note that the performance of tech stocks in India and across other geographies got a significant hit in 2022 due to macroeconomic uncertainties, the Russia-Ukraine war, funding winter, and the ripple effects of the same. With a lowered inflow of capital, the situation has become grim for unlisted tech startups as well.
This has forced most unicorns and soonicorns to aggressively focus on achieving profitability, which has come with a cost, layoffs.
So far, Indian tech startups have let go of over 23K employees since 2022, according to Inc42’s layoff tracker.
JM Financial analysts said that most of Sequoia’s portfolio startups are not only setting targets for operating profitability but also discussing metrics like profit after tax (PAT) and cash flow.
“We also note that the companies are avoiding investing heavily into ventures with long gestation periods while demarcating their profitable business segments vis-a-vis investment phase business segments,” the brokerage said.
As per JM Financial’s observation, while these startups are looking at a large and expansive Total Addressable Market (TAM), they are also heavily focused on the right customer segments. For instance, the brokerage said, Meesho is looking to better serve the value-conscious Tier 2 and beyond shoppers while Dailyhunt is aiming to create engaging content for the working class of India. On the other hand, CRED is targeting financial services for the top 1% of India.
“We hope that these companies continue this kind of engagement to not only educate public market participants but also themselves understand the difference between private and public market investors’ perspectives,” the brokerage added.
Meanwhile, it must also be noted that several Sequoia-backed startups have been marred with controversies since last year. The likes of BharatPe, Trell, Zilingo, and most recently, GoMechanic, are caught up in legal troubles and public mudslinging for fraudulent activities ranging from financial and accounting irregularities to other corporate governance issues.