In our opinion – “No”
Then what explains the recent turn of events? We all would have read about –
5,000+ layoffs done by Indian Startups recently,
Unicorns, which were being churned out for fun, are nowhere to be seen now,
VC Fund giants declaring record losses,
Global commentaries from investors turning conservative after ages,
Valuation of various startups plummeting, etc.
Let’s delve deep and understand what just happened.
Let’s ask ourselves – what were the first investing lessons we learned? Our answer would be “Financials”
Let us think of the world before the current startup frenzy – No one would even invest in a listed company whose profits have been deteriorating, set aside the thought of it not making any money at all.
Obviously, with time we evolve and learn new ways and things. However, in this transition, if we completely forget our basics, then it becomes an issue.
Delving deeper,
Nov 2019 - That’s when I made my first startup investment. I was lucky enough to get a chance to evaluate dozens of startups – and one thing which was common in all of them was – none of them was making money and had no plans to make some in the next few years. And the whole thesis behind this phenomenon in the market was - spotting winners early and making bets incorporating the future potential. Various investors had made fortunes by backing some early startups and made returns unheard of in public markets. FOMO is indeed a real thing.
Global Investors (Institutional + Retail), sensing an opportunity to earn a higher return, decided to jump into the boat.
We saw new VC Funds open and the existing ones raise new money. Note: This was all duly supported by the macro-economic environment globally – low-interest rates – ample liquidity in the system – some of which made their way to the VCs.
And the funds and investors did make money. Seed investors made money on exits to Pre-Series A investors, who made money on exits to Series A investors, and the money-making fiasco continued till Pre-IPO Series Investors. For the cycle to come a full circle – the caravan had to move to the IPO/public market investors. Why? As most of the VC Funds would’ve sold the majority of their stake by then – and the money earned would’ve again been pumped into the VC system.
Even this happened. IPOs came out. Got oversubscribed. Everyone was happy. Startups got listed.
Now, the macros, which were fully supportive a while back, decided to change sides. Inflation going up globally, Russia Ukraine War, rising oil prices, and ballooning Fed balance sheet – resulted in global interest rates going up – due to which the liquidity dried down. The listed startups’ valuations took a massive hit as well.
Now it would be very naïve of us to say that we did not see this coming. It was bound to happen. And as the fundamentals of the system were not sound, we were bound to see the current pain.
So why do we still think that this was not a bubble? In our view, this was bound to happen and we are glad that this happened sooner than anticipated. This speed breaker would prevent our high-speed car from crashing going forward. Now, why do we say so?
As the signs look promising. Commentaries from the investors have changed – and the concept of growth with cash flow visibility is the talk of the town right now. Even the startups are now realizing that they’ll need to generate some money to pay off the swashbuckling salary they offer to graduates from B-Schools (investors’ money can’t be used forever😊). On a serious note, the burn has to slow down and the evergreen concept of having a sound revenue model must be bought back again. This phase might result in a lot of zombie unicorns and some founders shutting their shop – but some cleaning is needed for a brighter and stronger future. The startups who pass this litmus test would reap huge benefits going forward. Macros would settle down eventually, liquidity would again normalize, and a funding frenzy would again begin. However, this time, the fundamentals would be much stronger.
Before closing the article – you might be thinking that what type of startups might emerge victorious? Well, we are no experts, but in our opinion – flexible founders who have a strong business model and their fundamentals in place – would be the winners. Now, this might sound obvious and simple – but the harsh truth is we humans sometimes fail to understand simple stuff. In long run – simplicity beats complexity and yeah, being simple is complex nowadays! 😊
Content Credits: Yogakshem Dangi