The startup ecosystem is not as dismal as it seems. The chill of funding winter may be setting in, but not all is doom and gloom. Rather, it is the time for cautious optimism.
Slowdown in Funding
In the third quarter of 2021, 209 startups could secure first-time funding. The total investment during Q3 rose to $14.8 billion. In the next quarter, the number dropped to $10 billion and then to $6.48 billion. Exactly one year later, only 106 startups clinched first-time funding, while later-stage startups, like OKCredit, Unacademy, Cars24, and Blinkit, have laid off employees or downscaled.
Funding is on a gradual decline for a cocktail of reasons. The tailwinds that helped some startups soar during the pandemic have quietened due to waning demand. Global interest rates have risen, and geopolitical tensions are high. Public markets have taken a hit, impacting private markets.
A Round of Correction
Markets, both private and public, go through ups and downs. These economic cycles have been occurring for decades and will continue to happen. Private equity and venture capital funds are treading more cautiously than before because the upcycle in 2021 was outrageous. So, the market is correcting by 10 to 12%.
Even though the startup ecosystem faces rough weather, it is a great opportunity for startups early in their life cycle and with a solid business model. Investors have shifted focus from writing big-ticket cheques for late-stage startups to young startups.
Angel investors and early-stage funds are placing smaller bets on startups across industries, from agritech to healthcare to video streaming. Any startup with a compelling solution to a real-world problem, an established revenue model, and a direct route to profitability that proves it can survive on its own will continue to see interest from investors.
These long-term bets make for a viable proposition because they allow investors to buy early and gain substantial returns when the startup scales. It is why Expertia AI, Beatoven.ai, and Flippy raised $1.2 million, $1 million, and $1.15 million, respectively, during their seed rounds this year.
Benefitting from the Current Market
Call it funding winter or a cycle downturn; it remains a good thing because it’s an opportunity. As Y Combinator eloquently put it in their open letter, "founders who quickly change their mindset, plan ahead, and make sure their company survives" can use this time to get their house in order and come out stronger. The advice here is to:
1. Focus obsessively on product-market fit.
2. Extend runways by slashing marketing, advertising and headcount costs and buckle down on building a sustainable business that generates promising value for investors and customers.
3. Reach profitability using current resources, so the startup has a consistent cash flow before the money runs out, i.e., work towards Default Alive. This is particularly useful because many startups won’t plan well for this time and will continue to maintain high burn. So, they are dead by the time the next funding round comes around. And that opens a market share for you simply by staying alive.
4. Target existing investors rather than new ones. Because founders already have a relationship with them, a current or previous investor will be more willing to support the startup than a new investor.
Tough Times Don’t Last; Tough People Do
Economic cycles come and go. Every startup has to go through seasons, both good and bad. The ones who can view funding winter as an opportunity get the chance to grow and mature. What is more fortuitous is that new startups have even more latitude than late-stage startups as the market recalibrates, as long as they take steps to benefit from the current sentiment.
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