If you are an entrepreneur or a part of the startup ecosystem, you must have come across the phrase ‘Funding Winter’ at least once in the last few weeks. What this essentially means is that startups across growth stages are finding it difficult to attract capital and funding. While growth startups are struggling with subsequent rounds of funding, early or seed startups are grappling with low valuations and initial capital. Subsequently, the number of startups entering the unicorn club has also been on a decline.
Statistically speaking, Q2 saw a 40% decline in startup funding with only $6.8 billion worth of investment raise. At the same time, this period saw an entry of only 4 Indian startups in the unicorn club. Large growth stage startups have been worse off in comparison to early age startups. While 61% of the total deal volume during this period was for early stage deals, large startups saw a 97% year on year decline in investments between July 2022 and July 2021. Overall, it was a 90% year on year drop. With inputs from experts, investors and analysts, we have been able to collate a list of 5 things that you must know as a startup founder about the funding winter and what you can expect.
#1: This quarter will see a further decline
First, entrepreneurs need to brace themselves for another slow quarter, which is likely to see a further decline in funding as compared to the last one. The combined funding in July & August 2022 reached only $2 billion. With just one month to go for the end of the quarter, it seems like this quarter will be one of the slowest quarters in the last 18 months for startup funding.
#2: Economic slowdown is guiding the funding winter
One of the major reasons for the funding winter has been the apparent economic slowdown globally, due to impending possibilities of recession, geopolitical instability due to the war, etc. Furthermore, inflation, higher interest rates are equally hampering the funding pool. At the same time, investors are no longer in a hurry to close deals as seen in the last year. The liquidity crunch worldwide is another reason fueling the funding winter.
#3: It will last another 12-18 months
While the impact and the force of the funding winter might fluctuate, it is likely to last for another 12-18 months, and even go up to 24 months according to some forecasts. Invariably, there will be considerable differences across sectors, locations and even growth stages. For instance, Fintech and e-commerce startups are likely to continue raising funds. At the same time, early stage startups with innovative ideas will attract funding, albeit with greater due diligence.
#4: Due diligence and tough questions will increase
While the available capital in the market is shrinking, investor expectations and bar is raising. Investors are now following a robust due diligence process before making an investment, taking into account all business fundamentals. The startups will have to face increased investor scrutiny and pass the same by ensuring transparent business records and resilience.
#5: Startups need to focus on sustainability
Sustainability and profitability will become the golden rules for startups that wish to survive through the funding winter and scale in the future. Startups will have to reduce unnecessary cash burn, cut inflated customer acquisition costs and prioritize stronger unit economics. Furthermore, startups must see this as an opportunity to turn their businesses cash positive, and move towards leaner business models. While employee layoff, bonus delays, cutting employee incentives have been some short-term measures for startups to survive through the funding winter, more strategic efforts will need to replace these quick trade offs for long term sustainability.
Brave your way through the Funding Winter
As a startup, while it is important for you to understand the nuances of the funding winter, it is equally vital to strategize and execute a robust plan to brave yourself through this phase. Here are a few ways you can fall back on:
- Explore alternative forms of raising capital like revenue based financing
- Consider bootstrapping in case of early stage venture, with a leaner business model, to prevent diminishing of your business valuation
- Rely on an effective financial plan with budget priorities to monitor high costs, facilitate cost optimization, focusing on high return with low investment
- Reduce customer acquisition costs by identifying partnerships and tapping into networks to explore mutual synergies
- Build relationships with business leaders, OEM partners and industry experts to help you navigate the way
- Focus on customer experience and success. When funding dries up, customer revenue and profits is what can help you sustain and your customer experience will determine your revenue
With uncertainty glooming all around, you need to focus on seeing the funding winter as an opportunity to explore the profitability and sustainability of your startup without external assistance. Startups that thrive through the funding winter will prove their resilience and attract high investments once the phase is over. If you want to focus your efforts and energy into garnering market insights to facilitate lower customer acquisition costs and connect with leading experts to build credible partnerships, get in touch with us at nikita@strategink.com and leverage Startup Pulse, StrategINK’s market activation catalyst to brave the funding winter.
