Some Misconceptions Running About The Funding Crunch, The Slow Down

Over the past couple of quarters, the news around the startup ecosystem has been mixed. While there are a few positives, there was a lot of news around things not going right. While some of the underlying facts may be accurate, but the interpretation of what that signals is often misguided or misinformed. Or perhaps those are one perspective on what’s happening in the startup world.

In this article, I attempt to present an alternate perspective.

Misconception 1: Investors invest only in consumer Internet startups – food tech, fin tech, ecommerce and delivery

We need to correct our definition of what ‘kind’ of startups different businesses are. Why do we call Flipkart and SnapDeal a technology business? They are formidable retail businesses with very, very strong competencies on supply-chain, warehousing, inventory management and logistics – key building blocks for any large retail business. Yes, they leverage technology significantly.

Likewise, Grofers is as much a brick & mortar business as DTDC Couriers is. Yes, they do leverage technology, but they are NOT an internet startup. Likewise, Swiggy is NOT an internet startup or a food-tech startup. They are a logistics company in the food business.

(Pure play internet startups will be companies like Truly Madly, Slack, WhatsApp, etc.).

There are a number of examples of companies with very little internet / cloud platform dependencies being funded. Mukunda Foods (an automatic dosa making machine) and Vahann are just two examples of non-tech ventures that are funded.

Misconception 2: There is a ‘funding crunch’. Several startups are shutting down because they do not get follow on funding.

Yes, several companies may have shut down because they were not able to get additional capital required for them to carry on. But that is NOT because funding has dried out.

I think it is important to separate ‘companies shutting down’ and ‘perceived funding crunch’ as two separate things. Related as they may be, they are neither the same nor necessarily the cause of one another.

Companies that are shutting down are largely because they have not been able to establish a business case, and it probably looked difficult to prove a healthy business model in the short to medium term.

But that’s OK. Entrepreneurship, especially VC funded models are about taking bets on experiments that you think have a reasonable chance of becoming a large, profitable business. And entrepreneurs make certain assumptions around their models, and investors who see that vision as a possibility make investments into these businesses and these assumptions. Sometimes these assumptions work out well, sometimes they don’t. And that’s perfectly OK.

So, shut downs could be a result of assumptions not proven right in the market and that could either be because the market was not ready, or because the market dynamics did not alter as expected, or the execution was poor or, as in some cases, they made the wrong strategic & tactical decisions.

On the other hand, the so called funding crunch is largely a media creation. Because there were much higher and larger number of investments in ‘experiments’ and new business models, investors are now not making wild bets on newer experiments. However, there is enough capital for businesses that are fundamentally strong concepts, and ideally with some assumptions tested at a small scale. Especially for early-stage ventures. If you have a fundamentally strong business, led by a strong & committed team there is capital available.

Here’s a link to a related article on what we can learn from failed startups.

Misconception 3: The ‘right’ amount to ask when looking for seed capital is $500K

Going by the data on how many people apply to us and other investor groups, $500K is a popular number among startups raising their seed rounds. “We are raising half a million dollars” sounds nice too.

$500K is a number that was the ‘sweet spot’ of a few angel investor groups. And because they would usually do investments in that range, startups found that if they said “Raising $500K”, they had a better chance of getting an opportunity to present.

However, as our investor eco-system matures, and as more platforms emerge to support new angel investors, there will be a lot more individuals willing to write smaller cheques than the HNIs who were the earliest angels. As a result, in my view, it is far, far more easier for several startups to raise INR 50 lakhs – INR 1 Cr. than to try and raise INR 3 – 5 Cr. (And often several businesses are really ready for just INR50 lakhs. At that amount the bet would be worth it. At INR3-5 Cr., it may not be a worthwhile investment).