Fundraising in Tough Times


Darshan Doshi

Darshan Doshi is our TiE Pune Charter Member and mentor, and the founder of Dasar. He is also an active PIC member. In this issue, he gives us some clues on the fundraising business that is so vital to all start-ups.

The numbers are mind-boggling! According to Inc 42, Indian startups raised over $12 billion in 1583 deals this year. But will this too follow the rules of gravity and come down with a plop? Will this surge in startup funding slow down over the next 12-18 months? So, how do startup founders, who have seen crazy valuations and big rounds of funding over the last two years, prepare for a probable correction in funding rounds and valuations?

Darshan spoke to a few managing partners of VC firms, startup ecosystem heads, and startup founders who are in the middle of fundraising to get an insight into the current funding landscape in India. The overall view is that the next 12-18 months are going to be a tough road ahead for founders who are in the market to raise funds from venture capitalists. On the other hand, the money is there to be deployed in the right startups. Here Darshan delinks the two contradictory statements with the use of the data below:

Ample Venture Capital and Private Equity Funds in India
According to CNBCTV18, global VC & PE fundraising touched an all-time high of $732 billion in 2021. According to an IVCA-EY report, VC & PE funds focused on India raised about $3 billion in Jan 2022. Over the last five years, private-money funds have bagged $44.6 billion. Sequoia Capital India is planning to raise an additional $2.8 billion fund focused on Indian and SE Asian startups. An Inc 42 report shows that 62 new funds in India raised a staggering $6 billion in fresh funding in 2021.

“These data points show that money is already raised by venture capital funds that need to be deployed over the next 3 to 5 years in Indian startups. Moreover, the top investors will double down going forward if the valuations see a correction, giving them an opportunity to invest in startups that have shown growth and differentiation – the right kind of startups” says Darshan.

Abhishek Prasad, Managing Partner at CSVP Fund, says, “The funding crunch has started; investors are more cautious, and more money will be diverted to public markets given the crash. The crunch will be across stages, even if funds are sitting on ‘dry’ powder today.”

Shashank Deshpande, Managing Partner at Pentathlon Ventures, on valuation, “The valuation of Public SaaS companies has corrected by more than 50% with multiples coming down from 16 to below 10. We expect this to cascade downwards from Series E to seed investments.”

Siddharth Dani, CFO at Easebuzz on funding crunch says, “I don’t see that much of a liquidity crunch as was anticipated in the last quarter. Overall, the situation is not bad with new funds coming up or existing funds launching new funds. The average ticket size has gone up for early-stage startups too!”

Sachin Oswal, a renowned angel investor, says, “Over the last 3 years we saw a massive digital transformation drive coupled with huge liquidity that was chasing startups and private markets. However, this will now revert to the fundamentals in the coming months.”

Global Indicators Showing Tough Times Ahead
According to David Sacks from Craft Ventures, fundraising is going to be tough in the coming months but still possible. David lays out what it will take to successfully fundraise in current market conditions. The chart indicates the metrics likely to be expected by investors from startups going forward.

The burn multiple suggested by David was echoed and highlighted by Shashank Deshpande from Pentathlon Ventures. He further adds, “Large VCs like Tiger Global and Softbank have been very tight-fisted since Q1 for late-stage investments. This has built backward pressure on early-stage investments. VCs will be cautious going forward and due diligence will be emphasized with valuations going down by 50% or so. Founders will need to show serious revenues/customer traction before going to institutional investors.”

Sachin Oswal says, “Early-stage investments will see more participation from angels than funds. Series A investors will demand a path to profitability and a rigorous focus on execution metrics. We will see a phase of consolidation/M&A for talent, cost-cutting, and synergies in the coming year. The focus will shift from growth rates (slow down) to CACs (go down), from customer counts to customer LTV. 10X will be the revenue multiple cap and not the floor.”

Abhishek Prasad says, “We are already seeing valuation corrections across the board, especially in D2C and B2C models. The frenzy of 2021 was not good for the Indian startup ecosystem, with valuation expectations getting inflated. At CSVP, we have not been a part of the frenzy and expect to see more interesting opportunities to participate now.”

The Way Forward For Startup Founders: Buckle Up!
Startup founders need to go back to survival mode as they did back in March 2020. Here are a few ways to consider as you revisit your game plan for the next 12-18 months.

Bring Down Your Burn Rate
Do a deep dive on what initiatives are driving revenues and what is not working. Double down on revenue growth and cut down the losses fast. Remove all the side projects that are good to have but don’t add to growth in the near future.

Freeze Hiring
Be very tentative in building additional capacity for projects that may not bring immediate revenues or those that don’t service existing customers. Streamline your people needs, get the buy-in of existing employees and create a sharp review protocol each week.

Stakeholder Management
One of the most important things that you must do is keep your existing investors, advisors, and prospective investors in continuous dialogue. Plan to send a monthly email before the 5th of each month to all your stakeholders with metrics and execution plans. Be sure to ask them for any help that you may need. If the prospective investors like the progress made by your startup, you have a great chance of closing a funding round when the time comes over the next few months.

Build 18 to 24 month Runway – Even at a Lower Valuation
If you can, raise some funding coupled with cost-cutting in order to survive the next 18-24 months, even if it means doing so at a lower valuation. This is always a tough call to make!

Siddharth Dani from Easebuzz says, “We had our first fundraise of $4 million about a year ago and it was done by ourselves. This time around, we’ve reached out to seasoned bankers to help us tap into global VCs and PEs.”

Abhishek Prasad from CSVP Fund says, “It will be tough for founders but there’s enough money for good business models. Capital will get ‘smarter’ and metrics will matter more. Founders need to get the right investors by their side and not make compromises by raising in a hurry.”

Sachin Oswal says, “The late-stage founders who have been around for 3+ years have had to course-correct twice in the Covid era. First, they cut costs and prepared for the Covid winter and then they cut loose to leverage the digital adoption that Covid brought. Having been through the survival exercise once, these founders will look at extending runways from 12-24 months which leads to rationalization of the overall business. Early-stage founders will draw upon learnings from the late-stage founders and end up building a fundamentally stronger business from the start. The count of new startups may slow down.”

To conclude, it is never easy to fundraise and more so during a downturn. However, times like these reveal the winners who go on to leave a legacy.

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