Bengaluru, India–In January, the founders of a business-to-business e-commerce startup were looking to raise $20m, in exchange for a 15 percent stake. While they were talking to three to four investors to finalize the deal, a new investor swooped in with a better offer: $50m for a 17 percent stake, valuing the nearly three-year-old business at a hefty $200m. Two days later, the investor gave the thrilled founders a term sheet, which is a non-binding offer.
But in March, citing reasons like “low margins” in their business, the investor pulled the deal, leaving the founders with no one else to raise money from and putting a sudden end to their aggressive expansion plans. That venture capital fund gave “random reasons” before pulling the deal, said an investor familiar with how the deal fell through, requesting anonymity as the conversations were private.
“The investor didn’t even inform the founders directly, just told the other investors that they are out.”
While another mid-stage startup founder in the financial technology space did manage to close a series C round, it was at a lower valuation than what firms were raising last year and it “wasn’t easy,” he said. The main reason, he said, was because by the time he started talking to investors, “the prices had started to correct and valuations had begun dropping.”
This seems to be the story for many mid-to-late stage startups recently. These are firms with an established market presence and had easily raised money in the past, and are expected to focus on cutting spending rather than chasing growth at high costs. After raising record funds in 2021, these startups are now either struggling to raise money or are seeing investors rescind offers at the last minute, startups complain.
For instance, an agritech startup that had raised funds five months back and was close to finalizing a $15m series A round in May from a venture capital firm, saw the deal fall apart, forcing the founders to look for ways to extend their runway – the amount of time a startup can keep functioning without running out of money – or pause ambitious business plans until they got more funds.
Some founders are also being asked to take money in a down round, raising money at a lower valuation when compared to their previous fund raises.
Some that raised successive rounds of funding in the last two years in a short time with high valuations may not be able to raise any funds for the next year at least as investors stress a sustainable business model and a path to profitability, say multiple investors that Al Jazeera spoke with, requesting anonymity.
These investors cited startups like e-commerce firms Meesho and Udaan. Meesho declined to comment, whereas Udaan denied the claim, citing its recent $250m fundraise through debt and convertible notes.
They’re not alone. Cred, Groww, Slice, and Unacademy are some other startups that have previously had successful fundraises and are now taking time to close their next funding round, according to a Money Control report. Many of these companies had raised multiple rounds last year with a gap of three to four months. Now it’s taking them six months to a year.
‘It’s officially winter’
“It will be very brutal this time,” said Anand Lunia, a partner at early-stage venture capital firm Indian Quotient. “Last year saw 3x the usual VC activity. This year only one-third of those will be getting follow-on funding…. Either the company needs to be written off or the company will be marked down. Since listed companies are down 80 percent plus, similar markdowns are logical, but only for the companies that can survive.”
These are early signs of a funding winter slowly setting in, where investors are asking tough questions about the startup’s sustainability, especially against the backdrop of global market uncertainty.
“I think it’s officially winter,” said Vinod Shankar, co-founder and partner at early-stage venture capital firm Java Capital. “It was obvious earlier when Tiger [Global] was walking out,” he said referring to a shift in strategy by New York-based investment firm Tiger Global Management, which went from aggressively investing in late-stage companies last year when it pumped in nearly $2.6bn across 63 deals in India, according to data by Venture Intelligence, to now focusing on early-stage deals. “Everyone is getting cautious and it’s very clear that at the mid-and-late stage, the money is only available for the really good ones—it’s not going to be as easy as before.”
Last year, some 1,400 Indian startups raised a whopping total of almost $38bn — the highest in a given year and three times the money raised in 2020. Many of these startups raised two to three successive rounds, skyrocketing their valuations in a short period. For instance, edtech giant Byju’s, which was valued at $11bn in late 2020, raised funds across multiple tranches in 2021 catapulting its valuation to $18bn. Similarly, Apna, a marketplace for blue and grey collar jobs, raised $70m at a $570m valuation in June 2021, which almost doubled within months when it raised $100m in September at a $1.1bn valuation — unusually high for a startup that is less than two years old.
Apna was among the more than 40 startups that were declared unicorns, meaning their valuation touched or crossed $1bn. Tiger Global played a significant role in making this happen for more than half of the unicorns, including Apna, as it aggressively made mid and late-stage deals.
Other funds that stacked up investments in Indian startups include Japan’s Softbank Group, which pumped $3bn in 2021, and Sequoia Capital, which raised two funds cumulatively worth $1.3bn in 2020 to invest in India and southeast Asia. Some of the other late-stage funds typically active in India include Prosus Ventures and Coatue Management.
In the last several months, however, Tiger Global has shifted strategy, only investing in early-stage deals. Its first seed investment in India was earlier this month when it co-led a $2.6m round in e-commerce enablement startup Shopflo. Even SoftBank said it is going to slow down on investments this year. The overall funding slump can also be seen in the monthly numbers: Indian startups raised $1.7bn in May, a 34 percent drop from the $2.65bn in April.
“The same funds that were chasing late-stage founders last year are not even answering their calls or responding to emails in the last six weeks,” said an early-stage venture capitalist, requesting anonymity because this detail was shared with him in a private conversation.
Another reason for the funding crunch, experts say, is the public market slump. In April, the NASDAQ composite index fell 13 percent with some of the top technology stocks plummeting. Limited partners — who invest in venture funds, money which is then invested in startups — typically have stakes in listed companies and debt, which they sell to invest in venture firms. “That’s how the money flow works,” said Subramanya S V, founder and chief executive of fintech startup Fisdom. “So when public markets correct, private markets get hit with a lag,” he added, explaining the recent funding squeeze. That, in turn, has led to a “significant shift” in the questions that investors are asking “from user growth to profitability and revenues, revenue multiples, how will this be valued at exit,” he said.
Justify valuations
While the funding crunch has affected startups across sectors, edtech companies, demand for whose services rose during the pandemic, seem to be the worst hit and are cutting costs, or even closing shop.
Edtech startup Vedantu announced on May 18 that it laid off more than 400 people — 7 per cent of its workforce— which came just weeks after it fired 200 people. At the same time, Unacademy got rid of about 10 percent of its workforce, while edtech firm Udayy shut operations after not being able to raise funds. The ones laying off people “still have money in the bank, but are looking at ways to reduce their expenses so that they can extend their runway,” said an investor with a venture debt fund, requesting anonymity.
Investors say the shake-out will leave the better startups standing. “We see later stage rounds slowing down in pace, and concentration of capital towards market leaders, category winners,” said Manish Kheterpal, founder and managing partner at Waterbridge Ventures. “Overall this multiplied correction for EdTech, SaaS, HealthTech type sectors is a healthy change for improvement in quality of businesses and focus on building enduring businesses.”
What’s happening in India is a reflection of a sentiment that’s playing out globally, investors say. Some venture capital firms have started to issue warnings about the impending funding crunch. Sequoia Capital, the marquee investor firm with headquarters in Menlo Park, California, in a 52-slide presentation, told its founders to conserve cash due to the uncertainty and change brought by the combination of “turbulent financial markets, inflation and geopolitical conflict”. Startup accelerator Y Combinator issued a similar warning. In India, edtech startup Unacademy’s founder Gaurav Munjal also warned his employees about the funding winter for the next 12 to 24 months, making profitability their priority.
“This is a cyclical event and of course, many startups will come out of it,” said India Quotient’s Lunia. “But this time, even very well funded startups won’t survive [because] the unique feature of this boom was that startups were built around untenable foundations and were simply chasing capital. We will see many of these pivoting to become Zombies.”
Despite this, the situation doesn’t look as grim for early stage startups for now. These companies are mostly fairly early in their life cycle and raise money from either angel investors, or early-stage funds, which is one of the reasons why money flow hasn’t come to a grinding halt for them.
“At an early stage people are still excited,” said Harsh Shah, an angel investor and founder of retail technology startup Fynd. “They are anyway not being judged based on any data at the early stage, it’s more the calibre of the team, the idea and the market size — none of which has changed from a capital flow perspective.”
But if the funding winter gets stretched, many early-stage startups may not survive a prolonged crunch.
