Why Indian Startups Need To Get The Basics Right To Survive The Funding Winter

The startup ecosystem in India experienced a funding boom immediately after the pandemic subsided, but over the past few months, a funding winter has set in. Investors are wary of placing sizeable bets, and big-ticket deals are becoming increasingly rare. After the pandemic, which gave a significant boost to the Indian startup ecosystem, India became the sought-after market for investors worldwide to consider investing in. However, the surge in demand was short-lived. Things have slowed down after a 15-18 month funding frenzy.

According to a Tracxn study, quarter-on-quarter funding hit record numbers in Q3 of 2021, reaching $14.8 Bn. From there, things were steady until Q2 of 2022, which is where the dip began. A recent report showed that VC funding in India hit a 21-month low in the July-September quarter, with 387 deals bringing in merely $2.8 Bn, compared to the $9.8 Bn raised in 525 deals at the same time last year.

However, all isn’t lost. In fact, venture capitalists, private equity, and strategic investors believe that a funding winter might be healthy for India’s fast-growing startup ecosystem. Here’s why.

Resetting Is Essential 

The Indian startup ecosystem is home to over 57,000 startups, and several new businesses continue to emerge each quarter. Not every single startup will succeed, as evidenced by previous investor investments.  So, evaluating and identifying high-potential and promising startups will benefit investors and the entire ecosystem, making a reset essential. 

It will not only assist investors in making the right investment at the right startup, but it will also help streamline funding without disrupting the startup environment in India, striking the right balance.

Funding 2.0: A More Refined Process 

A funding winter, although it might be harsh for the time being, can be healthy for India’s startups. It could put an end to the frenzied “over investing” and the irrational hyper-valuation of emerging companies that’s been happening over the past couple of years. 

Aside from that, when the funding winter ends, which may take some time, the country’s start-ups will have a more principled, efficient, and sustainable funding process and system with less hyped valuations than in the past.

Reverting To The Basics To Establish Sound Methodologies

There has now emerged a need for investors and the startup ecosystem to ensure that the best companies win on the merit of their business model, execution, and innovation, among other factors, rather than being overpowered by excess capital in the market. 

Until the second quarter of this year, free cheque writing occurred, and cash burn was not taken seriously, which is not sustainable. Furthermore, several startups are facing legal issues due to a lack of compliance, unfair business practices, and other such issues, which contribute to attrition and layoff rates and add to founders’ woes.

The funding slowdown is expected to make everyone more rational and grounded, ensuring the long-term viability of a startup without the need for interim layoffs. 

Bottomline

From an entrepreneurial standpoint, founders are looking for investors who can contribute their expertise to the company — true partners. So, despite the slowdown and what appears to be a harsh funding winter, good companies with solid business models and capable founders will continue to raise capital.

The funding winter will not last forever, but it will serve as a reset button for the startup ecosystem, giving it a reality check. It’s a Regression Toward the Mean, which means that unusual/extreme events are likely to be followed by more typical ones, balancing the scales. Every funding slowdown in the last decade has been followed by a period of rationalism, and this would be no exception.