How venture capital is emphasising long-term business models more and more
11 Jan 2023
How venture capital is emphasising long-term business models more and more
The need for capital preservation inside businesses is being emphasised more and more by the global macroeconomic environment that is in place today. Investor confidence has been weakened by global macroeconomic headwinds such high inflation, interest rate increases, and the ongoing Russia-Ukraine conflict. The situation has spread to India, where investors are still hesitant to make sizable investments in unicorns and late-stage start-ups due to a lack of big-ticket finance.
In Q2 FY23, venture capital funding in India reached a 21-month low, according to a recent CB Insights study. Funding declined from $9.8 billion to $2.8 billion in the same time last year. In the same time frame, there were 387 less deals than there were 525, a decline.
There is money sitting on the sidelines, despite the fact that transaction activity levels may appear to have slowed down and that many sophisticated market participants are talking about a protracted funding winter (certain wealthy countries are persuaded that a recession is imminent). Investors are holding a sizable amount of dry powder, estimated to be in the billions of dollars, which needs to be used soon.
In addition to the dry powder of the existing funds, a number of new funds that have recently been established have raised $6 billion in additional uninvested cash. However, this capital will be more difficult to acquire; it will also require a lot of vigilance, frequently to make up for the lack of liquidity.
Since capital providers are cautiously allocating funds in a world that suddenly seems very different from what it did at the beginning of the calendar year, the current environment for entrepreneurs raising new financing has become selective. The start-up ecosystem has recently experienced a particularly hospitable funding environment in which businesses command high valuations and are inundated with capital proposals.
A record number of new businesses became profitable during this time. Many of these unicorns are having a difficult time adjusting to the new situation. Due to the current market conditions, IPO-bound companies like OYO and Pharmeasy have postponed their planned IPOs and are instead concentrating on enhancing unit economics and making them profitable.
The investment value in OYO by SoftBank, a sizable and well-known late-stage startup investor, has also been reduced by more than 20%. This trend has also been demonstrated in public markets, where more sustainable unicorns like Nykaa have received considerably better treatment than loss-making ones like Paytm, Zomato, and Policy Bazaar.
Investors are returning to the fundamentals in the current market. The markets in general and businesses that can scale without requiring outside funding to cover cash burn, including Titan, Pidilite, Dabur, and Asian Paints in particular, are close to all-time highs. The lustre associated with "new world enterprises that should not be exposed to quarterly earnings calls" is quickly fading.
In order to discern between high quality and not so high quality investments, investors are probing farther, studying the unit economics of enterprises, and taking a closer look at previously ignored (or less carefully examined) factors.
Given the murky environment of today, funding may have dried up for unicorns and late-stage online businesses, but there is dry powder available for use in high-quality companies. Businesses that are delivering technology-enabled services, building consumer brands, switching from disorganised to organised services, or working in the healthcare sector with an emphasis on high-quality patient care are likely to be successful in the future.