“I have a few smaller termsheets but the money has not been wired; in one instance, it has been three weeks since the commitment. Now I am unsure whether the cheque will come or not,” says an early-stage founder from Bengaluru who does not want to be identified.
For him, the priority now is to close the funding round as soon as possible, even if the total fund size is lower than his initial target. His case is not alone. Funding slowdown has hit start-ups across stages, whether it is growth-stage companies not being able to raise new funding, or early-stage start-ups who have to settle for lower than expected valuations and fund sizes.
According to data shared by Tracxn, in Q2 CY22 year-to-date (April 1 to May 24), Indian start-ups have raised $3.6 billion in venture capital rounds as compared to $9.7 billion in Q1 CY22 and $14.2 billion in Q4 CY21.
Many venture capital firms that have closed new funds continue to invest, but are now negotiating valuations.
“Valuation number largely depends on demand and supply. If there is more demand for a particular start-up, that founder is in a position to command a premium on its valuation. Now, with demand drying up, founders will have to reassess their valuation expectations,” Ashvin Chadha, Founding Partner, Anicut Capital, told BusinessLine.
Less demand
Agreeing with Chadha, Rajiv Srivatsa, Partner/Investor at Antler India said, “The kind of high valuations that founders commanded earlier have certainly decreased. There is a reduction in the velocity, there is a reduction in starting investment size as well as the follow-on capital cheque sizes.”
He added that VC firms will continue to invest because they raised a humungous amount of capital last year. What will happen is that more money will go to VC’s existing portfolio instead of newer bets.
“Even when they invest in new companies, they will just ask harder questions. If earlier they were investing in 3 out of 50 start-ups, now they will probably invest in 1 out of 50 start-ups,” said Srivatsa.
However, Nakul Saxena, Head of Fund Strategy and Investor Relations at LetsVenture, said that there is not much fall-off in valuations in early-stage start-ups but he expects it to happen in future.
Asking tough questions
The popular start-up proverb ‘Move fast and break things’ seems to have lost its allure in the current times. While earlier the investor-founder conversations were around the start-ups’ growth rate, now the focus is on metrics like customer retention and sustainable growth.
“I think unit economics with the path to profitability is a very clear question today. These questions have always been important, but now there is more focus on them. The second aspect is about the usage of capital, as to where the business is investing its capital. Because this becomes a question of increasing runway and company’s ability to maintain a tight ship and to sail it,” said Amit Nawka, India Startups Leader at PwC India.
LetsVenture’s Saxena also noted that investors are more cautious now and are asking tough questions.
“One thing is very clear — copycat start-ups are finding it hard to raise funds. But companies who have got traction and are building innovative businesses are still able to raise investments,“ he added.