No more FOMO, as VCs approach startup funding with new metrics and priorities

Billions have turned into millions as the startup funding environment has fallen from its highest level in 2021 to a calmer situation in 2022. Total venture capital funding in July of this year saw the decline, as was $652.7 million compared to $2.7 billion in June.

2021 saw an influx of capital into Indian start-ups, with 38 billion dollars Flowing into the ecosystem, the emergence of more than 40 unicorns. It was also a period when venture capitalists took hold of FOMO (fear of missing out).

Speaking of those days, a venture capitalist said, on condition of anonymity, “there were deals that closed in three days when the due diligence for an initial investment would take at least three to four weeks.”

Now there has been a complete turnaround in the situation, with a sharp drop in funding in July. This trend is likely to continue for at least the rest of the year. In this scenario, startups are prudent with spending limits and cutting costs while cutting jobs. They also find it difficult to raise new capital.

Venky HrinarayanPartner, Rocketship.vc says, “Now capital is scarce with the bar for investors rising. We are in a transitional phase now and it’s hard to say where you’re going to settle.”

In this environment, investors’ priorities and approaches to financing startups have changed. your story Talk to a wide range of venture capitalists to understand the key trends now and move forward.

July 2022 saw a sharp drop in the inflow of venture capital

Closing deals takes time

During the 2021 funding boom, startup deals were closing in a matter of days due to the FOMO factor. Now it’s starting to feel back to normal, as early trades, especially in the Angels category, took a month or so. Growth stage deals, which involve larger amounts of money, take months to close. In essence, the focus is on careful due diligence for startups.

“There is no FOMO among investors now, which was noticeable in 2021, and they are in no rush to close the round. Also, there is no pressure on them to do a certain number of deals,” says Edith Podhar, founder of Gemba Capital.

Focus on early stage financing

The funding winter has not limited the flow of capital to early-stage startups, as investors continue to bet on innovative companies, rather than give up on opportunities. The expectation is that once the tide turns, investors have a better chance of success.

Anchor MetalCo-founder, Inflection Point Ventures, an angel investment platform, says, “A rapid expansion and expansion of first generation startups took place in 2021, and investors and the entire ecosystem were generally positive. 2022 saw quite a few high-quality deals, although Their number is declining, which indicates a strong recovery after COVID-19. High-quality startups have aroused more investor interest.”

Growth stage startups, especially those in Category A and above, will find it more difficult to raise funding because it will involve larger amounts of money.

new metrics

The funding boom in 2021 was all about focusing on metrics for a startup’s growth but now the focus has shifted to sustainability. Questions are asked about burning money, the path to profitability, and building a sustainable business over the long term. Earlier, it was all about growth at any cost, which naturally resulted in large amounts of money being spent acquiring customers in order to gain market share.

Also, given the easy access to capital in 2021, startups haven’t really focused on conserving cash. Today, it’s all about expanding the runway in terms of how much money is in the bank account, so that it can last for at least two quarters.

V BalakrishnanCo-founder, Exfinity Venture Partners, says, “B2C startups could see a reassessment of their valuation and there could be more focus on their business model. The startups among startups seem to be relatively stable due to the low burn-out rate.”

discounted rating

Startups may now have to raise capital at a low valuation or with a fixed round. This will lead to a reassessment of startup companies, especially startups in the growth stage. This is also an after effect of the correction occurring in the general markets. Valuations in some segments, which are generally calculated at forty times the startup’s revenue, may not be possible at this time.

Closer interaction

The pessimistic economic environment of 2022 turned the tables on the type of interaction the founders had with their investors. In 2021, the founders had some sort of upper hand with investors driven by FOMO. The founders now need the support of their existing investors to better navigate the current environment. This may mean additional urgent capital to overcome the crisis.

Amit Kumar, partner, ah! “Startups are now looking at a bridge round of funding to expand their runway and will consider significant capital increases once demand returns,” says Venture Partners, an early-stage angel investment platform.

The quality of the founders

The quality of the startup and founder now makes all the difference to the investor community. Earlier, many startups also received funding, but this may not be the case anymore with the scarcity of capital. Only those with the correct credentials are now funded. Given that there is an increased focus on the due diligence process, the standard has certainly become higher for founders to obtain funding in the current environment.

Total venture capital funding in July of this year was $652.7 million, compared to $2.7 billion in June.

Question marks on exits

The current environment makes it difficult for both startups and investors to get a way out. Rich valuations for 2021 are unlikely to be the criteria now. This means that the founders will have to devote their time before they go to the next round of financing, because any step in this direction will mean raising capital at a low valuation, which the current investors and founders will not agree with. This could lead to valuation mismatch and collapse of M&A deals.

Balakrishnan of Exfinity Venture Partners believes there may be a correction in the net asset value of invested companies in terms of their startup investments next year.

Investing in new areas

Opinions are divided on how investments will proceed, especially with negative developments in areas such as cryptocurrency and NFT. Some investors believe that investments in these areas will decline while others believe that they will continue.

Anchor of Inflection Point Ventures says,A number of technologies gained attention in 2022, including NFT and blockchain. Despite all their skepticism, entrepreneurs are exploring these matters and investors are increasingly interested in them.”

Despite the so-called funding winter, the medium to long-term story of the Indian startup ecosystem remains very strong. The current state is unlikely to last for long, and the expectation is that things should start to turn by early next year, if not sooner, although one may not see a boom in 2021.

Adith of Gemba Capital says: “Deal activity is picking on the part of investors, after their initial step back. Sufficient dry powder is available in terms of capital.”

(Story has been updated to correct a typo.)