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Wednesday, January 25, 2023

Funding race between unicorns & cockroaches starts as investors gear up for 2023

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We all know that in the business world, billion dollar companies are called unicorns. But, there are also businesses called, cockroaches, which grow gradually and progressively from the time they are founded. A cockroach startup places a strong emphasis on sales as well as profit and maintains strict cost management to guarantee that its development is financially solid.

Following a turbulent 2022, as investors and entrepreneurs prepare for an uncertain 2023, it will be intriguing to watch who wins the race—mythical unicorn monsters or real, immune cockroaches that can endure a nuclear war.

Priyanka Bansal (name changed), the founder of an edtech startup, was searching for $12 million in Series A investment in November.

Her premise was straightforward: early-stage funding was still unaffected by the much-discussed funding winter, and her firm catered to higher education and upskilling, a popular niche among edtechs even this year, when entrepreneurs faced a funding winter.

As central banks throughout the world boosted interest rates to combat inflation, which escalated during Europe’s Russia-Ukraine conflict, causing financial markets to tremble, funding for startups dried up.

In 2021, startups in India raised about $41 billion in equity rounds, implying that they had a lot of capital on their books. However, financing has been constantly slowing since the first quarter of this year due to macroeconomic difficulties.

According to statistics compiled by private market intelligence platform Tracxn Technologies, private equity (PE) and venture capital financing will shrink to $25.9 billion in 2022.

According to the statistics, funding was cut in half in the last three quarters of 2022, to $18.1 billion, compared to the same time in 2021.

But, much to Bansal’s surprise, when she met with investors in November, she received relatively few inquiries regarding her startup’s planned revenue growth and TAM.

Investors also asked relatively few questions regarding the startup’s vision on the industry.

These are unusual questions for investors to ask during Series A investment rounds. “Last year, investors were preoccupied with TAM and revenue estimates.

Things have altered this year, due to the financing winter. For example, whereas the revenue multiple was heavily debated last year, it has since been replaced by the EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) multiple.

Investors are becoming more selective of companies with poor unit economics “the individual noted.

Bansal isn’t the only one. Many startups had a similar experience this year while raising funding, as investors looked beyond TAM and revenue predictions before investing, even at the early stages.

The much-discussed fundraising cold that has shook the world’s third-largest startup ecosystem has also made investors more cautious about investing. Naturally, many are transferring their hopes to more immune cockroaches, who are likely to overtake unicorns as the most-wanted startup species in 2023.

The word “cockroach” refers to a company that may endure during periods of financing slowdowns by tightening cost controls.

Anand Lunia, founding partner of India Quotient, said, “Companies raised a lot of money in 2021, so they have some buffer till at least a quarter or two in 2023. However, they are also the firms with a high burn rate. As a result, these may die slowly in the short term. Investors may return next year. They will, however, come carefully and will choose to invest in firms that have lowered burn and continued to expand and have the ability to thrive indefinitely without further money.”

With investors becoming increasingly interested in unit economics, companies were forced to adjust their focus from ‘growth at any cost’ to sustainable growth.

Naturally, ‘profitability’ was one of the most hotly debated subjects in the startup industry this year.

In May, the media claimed that just one-fifth of India’s then-100 unicorns, or around 23 of them, were profitable. In fact, edtech platform Byju’s came under fire throughout the year for declaring a loss of more than Rs 4,500 crore for FY21 (2020-21), making it India’s largest loss-making company in FY21. Furthermore, public shareholders’ reactions to businesses like as Zomato, Paytm, and Policybazaar demonstrated India’s poor desire for shares of high-growth, loss-making enterprises.

Shares of PB Fintech (parent of Policybazaar), Zomato, and One97 Communications (parent of Paytm) have plunged 51-60% since the beginning of 2022. The three firms are also selling substantially below their IPO valuations.

According to industry analysts, this forced private market investors to urge even early-stage businesses to focus on greater unit economics.

Naik noted, “The issue will affect firms that were once prosperous but then stopped growing. There are firms that continue to grow while also cutting expenses and showing profitability. However, organisations that are not developing or are not moving toward profitability will face difficulties.” 

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