If you’re an ambitious entrepreneur ready to take the leap and start your own business, having easy access to funding is essential. Today’s economic landscape can be daunting but don’t let it stop you from turning those dreams into reality.
Dinesh Menon, Founder’s office, Onsurity recently held a captivating chat with three exceptional investors to explore the available funding options for startups amidst this invigorating ‘funding winter’. It was surely an exciting conversation that left us curious about what could come ahead! On the panel we had:
- Anand Datta, Principal, Nexus Venture Partners
- Abhishek Shah, Vice President, Elev8 Venture Partners, and
- Mayank Jain, Principal, Stellaris Venture Partners
These investors are sector-agnostic and support start-ups from across multiple sectors. In India, start-ups saw a massive boom in 2020 and 2021. In 2021-22 alone, funding reached $37.2 billion. Beyond that, there was a massive slump. It resulted in a 35% decrease in funding, which fell to $24.7 billion by November 2022. So, how is 2023 going to treat the startup ecosystem? Here’s how founders can deal with the so-called funding winter.
Start a Dialogue Today
Often, founders worry about the right time to approach investors. Rejections are hard to handle but approaching the right person at the right time is crucial. Menon opened the discussion by addressing this very concern: Do you need a Minimum Viable Product (MVP) before you can approach an investor?
According to Datta, there is no perfect time for start-ups to raise funds. He said, “Start interacting with investors as soon as you start thinking.” Brainstorming with investors from the early stage will help refine the product. Investors work with numerous start-ups and entrepreneurs. They have more insight into whether any similar work has been done in the past, what worked, and what didn’t. There is no need for an MVP in all cases.
When discussing expansion, Shah expects some statistics supporting market viability and demands. Funds for expansion should be used to gain market share. Jain added that start-ups should look for the right investors for the pre-seed and seed stages. “As a founder, you should have an open-ended conversation with investor friends to take feedback, instead of directly pitching ideas in the pre-seed stage,” he said. Early-stage investors are like catalysts. They can provide inputs on ideas, help extend networks, and connect a founder to the right set of people who can help.
Share Your Ideas
Convincing investors to back your venture is no small feat. You need hard data and figures when making a pitch, but for startups in the pre-seed or seed stage, that can be difficult with nothing more than an idea on hand. Winning over potential partners at this early juncture truly takes skill! If your ideas seem precious, you may have reservations about sharing them with investors you have not yet established a connection with. “How much of their idea should founders share with investors? What if they have some reservations?” asked Menon.
Jain suggested that founders should be lucid and truthful about their ideas when talking to potential investors. Investors continually evaluate startups to decide if they’re a wise investment, but during the pre-seed stage there are no metrics yet for them to go off of. In this case, founders should convey their idea and how they plan to execute them. There is no point in hiding information from investors. It is better to check beforehand whether the investor has any conflicting investments. Digging some background about the investor will help determine what information you should share.
When it comes to investing, the market and founder are vital pieces of the puzzle. It’s essential for investors to understand what problem the founder is attempting to solve and how well-equipped they are at tackling that issue. A great deal hinges on this information!
When founders enter the growth stage, they must have 3-4 years of experience executing the ideas. They must also have significant numbers that showcase their role in the market. Shah said, “We don’t want the companies we invest in to die after a few years.” Investors perform due diligence and look beyond founders. They also look at senior management and this is exactly why a start-up in the growth stage should invest in its people.
Having the right chemistry between founders and investors is key. Founders should consider an investor’s network, experience, and expertise to help optimize their product for optimum results.
What does 2023 have in store for Start-ups?
There’s no doubt that this is a time of economic uncertainty, and it’s bringing plenty of worry. Layoffs are on the rise as companies across sectors tighten their belts in anticipation of an impending recession, making international funding harder to come by than ever before.
But Datta is not worried. He says, “I have not seen funding winter in the seed stage as of now.” Valuations and base calculations have not been corrected. However, the number of people willing to start a new venture has decreased. People are more cautious about launching a start-up now compared to 2019.
Funding winter is significant in the later stages.
Most start-ups begin with a hypothesis. At different stages, there will be different proofs for the hypothesis. During growth, start-ups work on acquiring customers, and they can decide whether they want to reap benefits right away. The founders must know how much runway they have with their customers.
Businesses must efficiently manage burn rates and decide how they want to grow. If your business is in the digital space, you must compromise on growth to achieve maximum profitability. If you focus on growing quickly, the profits may not come by. However, if the start-up has a fast growth rate with high profitability, there is no need for a funding discussion because inbound investors will already be there. Datta added, “There is no right or wrong way to grow a business. It depends on the pace the founder wants to go with.”
It’s important to note that market conditions for early-stage, growth-stage, and late-stage investing are different. Tourist investors are going slow. The early-stage ecosystem has non-tourist investors. So, there is no need for early-stage startups to worry about funding winter which is great for entrepreneurs interested in launching a start-up.
However, the late-stage, pre-IPO investing scenario is different. There is a crunch because of the uncertainty around terminal or exit value due to the IPO market. Founders must have a framework based on risk elimination. The main question that investors ask is about product market fit – do you have customers who are massive supporters? Can they bring in more to your company?
Shah acknowledged the current contraction in growth stage investment, citing the decrease in foreign capital inflows into the market. He also highlighted the challenge of justifying 2021 valuations in the long term and emphasized on the need for businesses that raised funds in 2021 to demonstrate their ability to drive growth through internal efforts.
Managing Layoffs in a Tough Economic Climate
Large tech companies have started massive layoffs. Given the current situation, it is expected that more businesses and startups will try and cut costs to sustain themselves. So, what should founders do when a layoff is necessary?
It is not easy for founders to let go of their team. Dutta admits that laying off is an emotional decision. He said, ‘Building your team as a family and letting them go is difficult. Have a one-on-one conversation and even bring in counsellors to let the employees talk to someone. Business is tough, and you may have to take tough decisions. Handle with empathy!’
Shah said, ‘Sometimes you have to do certain things even if you don’t want to. Empathy is the key here.’ Sharing his own experience, Jain said “Even my company went through that process. It is better to talk openly instead of building mistrust.”
Focus on Building a Relationship with Investors
Investors play a crucial role in the success of a start-up beyond just providing financial support. As external partners, they can offer valuable insights and connections that can help a founder take their business to new heights. Dedicated investors are invested in the success of the company and strive to offer guidance and support to help the business reach its full potential. To make the most of this relationship, founders should approach their investors with an open mind, by welcoming feedback and suggestions to help them navigate the challenges of building and scaling a business. By establishing a collaborative partnership with investors, founders can leverage their expertise and resources to drive growth and achieve their goals.
Jain said that he wants to build enough trust with the founder before giving feedback. He adds, “I don’t sugarcoat. If there is trust in the relationship, the other person will take the feedback.” Datta added, “I become a part of the family. So, feedback is all about improvising the product. Sometimes, we may start with an idea, but when the product is created, it might be something different. So, we will work on creating something better for the market.”