Startups, here's how to survive the freezing funding winter

From $4.96 billion in funding in April 2021, the monthly numbers dipped to $2.65 billion in 2022, and then plunged to $989.5 million in 2023.

Winter is coming,” reckoned Jon Snow. “We know what’s coming with it,” underlined the fictional character in A Song of Ice and Fire series of fantasy novels penned by American author and screenwriter George RR Martin, which were later adapted for TV as Game of Thrones. “The enemy is real… it’s always been real,” Snow talked about the threat.

Back in the real world of entrepreneurship, which looked nothing short of fantasy during the unprecedented funding spring of 2021, the threat of a severe funding squeeze started to look real and imminent from the second half of 2022. And it turned fatal towards the fag end of 2022 and the beginning of 2023. Look at the numbers. From $4.96 billion in funding in April 2021, the monthly numbers dipped to $2.65 billion in 2022, and then plunged to $989.5 million in 2023.


As one moved to November, the decline persisted: $4.33 billion in 2021 to $644 million in 2023. Though the funding data in December (till 25th of the month) looks promising—$1.65 billion in 2023—it still lacks the firepower to push the overall funding amount in the 12 months of 2023 to even half of the dollars that poured in in 2022 or what it was in 2021 (see box). The going was set to be tough, and one had to anticipate and prepare to avoid the consequences of staying ignorant. “What we don’t know is usually what gets us killed,” Lord Petyr Baelish, another fictional character, remarked in Game of Thrones.

Fortunately, most of the startup founders knew what was coming, and made provisions accordingly. They knew the funding chaos was real, but they looked at the positive side, much like what Baelish advised all to do when confronted with adversity. “Chaos isn’t a pit. Chaos is a ladder. Many who try to climb it fail… some are given a chance to climb, but they refuse,” he reckoned. This special issue of Forbes India chronicles the journey of a clutch of startups— InsuranceDekho, Mintifi, Bizongo, FreshtoHome, Zetwerk, KreditBee and Zepto—who viewed chaos as a ladder, raised $100-million plus amidst intense winter funding (Bizongo happens to be an exception as it raised $50 million. But how can we miss the tale of an ‘almost unicorn’)—and are still clambering their way out of the trench.

Also read: India tech startup funding in 2023: Takeaways from a five-year low



What makes the founders special, reckon venture capitalists, is their tenacity to fight the odds. Typically, companies raising over $100 million in equity in such a market have demonstrated strong execution, growth at scale, clear PMF (product-market fit) for a differentiated target segment, strong unit economics or Ebitda (earnings before interest, taxes, depreciation, and amortisation), and have shown significant IPO potential, underlines Niren Shah, managing director of Norwest India. One key learning for founders is that while we are in a funding winter, stresses Shah, there is a significant amount of capital available for fundamentally sound businesses. The mistake most of the funds make is to over-deploy in a bull cycle and conversely be extremely conservative when the multiples have significantly corrected. “We are a bit contrarian in our approach and are looking for less obvious deals at current market multiples where we believe we could create alpha,” he says.



An impressive report card is also something that attracted the backers. Praveen Sridharan explains. “Some of these companies are category leaders or among the top three, which is why you see a lot of interest,” says the partner at TVS Capital Funds. The guys who stand out, he reckons, will always attract interest whether it’s funding winter or no winter. “They stand out because of their ability to look at situations, execute, deliver, morph and modify,” he adds.

Also read: Three VCs on how they are changing India's deeptech landscape
 
As entrepreneurs prepare to endure a harsh winter which might thaw over the next few months, they need to remind themselves that a lot still has to be done. “Entrepreneurship is a game of thrones,” says Jai Vardhan, co-founder of Entrackr, a media venture tracking startups and the internet economy in India. When you play this game, he reckons, you must remember what Cersei Lannister remarked in Game of Thrones. “When you play the game of thrones, you win or you die. There is no middle ground.” Winter is here, and the game is getting intense.