Startup winter

'Winter is coming', and when we say that in almost 50 degree touching scorching month of May, you know that it has nothing to do with weather and everything to do with the economic clime. We've gone straight from swooning over 100 unicorns to talking about startup layoffs. The exuberance of last year has finally waned and global headwinds are catching up with the vibrant Indian startup ecosystem. With warnings to brace for impact coming in from foreign and 'desi' investors, startups across the board have cut costs, shut down unviable business verticals, and frozen hiring of new talent.

Layoffs were happening for a while this year with many enterprises resorting to cutting down staff with a view to rationalise costs. According to news reports, over 8,000 people have been handed the payslip by startups this year, and it's not the end yet. From Vedantu, Unacademy, and Lido Learning to Mfine, Cars24, Meesho, Trell, Furlenco and Ola, startups have cut down jobs with a fervour, and more layoffs are on the anvil. The deliberate cost-cutting has been further fuelled by geo-political exigencies. The Russia-Ukraine war has increased fuel costs, thereby pumping up the cost of logistics. High inflation and increase in interest rates by central banks have further reduced availability of funds. With investors opting to put their money into bonds, it's expected that capital allocation to startups would taper off as well. Meanwhile, there was a bloodbath of tech companies in the public markets.

One of the earliest to issue the clarion call on the upcoming global recession was Silicon Valley startup accelerator, YCombinator. The American accelerator that has launched over 3,000 companies including Airbnb, Dropbox, and Reddit, urged startups to "cut costs and extend your runway". Behemoth venture capital firm, Sequoia Capital, also sent out a 52-page missive to its portfolio companies about the 'crucible moment'. "Unlike prior periods, sources of cheap capital are not coming to save the day," Sequoia said along with the prediction that there would not be an "equally swift V-shaped recovery".

Coming at the back of analytics firm, CB Insights, projecting a 31 per cent drop in VC funding in Asia in April-June quarter after a 36 per cent decline in January-March 2022, the death knell of funding was also soundly rung. Some Indian VCs also shed light on the situation. Orios Venture Partners urged their investees to "become conservative with hiring" as capital would remain constrained till the first half of 2023.

While most investors won't hazard a guess on the end of the purported startup winter, by all indications it's projected to continue till next year. And in the startup world, that's a long time, mate! Most startups have so far needed regular funding rounds to get to product-market fit, but since the pandemic the notations have been changing. More investors are emphasising on efficient business models and break-even/profitability targets that are not elusive but rather achievable in the near future. In its detailed memo, Sequoia went on to say that founders would have to now keep profitability, and not hypergrowth at any cost, as their goal. Some investors also see an opportunity during turbulent times. Pearl Agarwal of micro VC fund, Eximius Ventures, wrote in her advisory on LinkedIn that "real builders will come in (a) bear market". And this may well hold true for startups that have been cautious and working on their business foundations. So, don't be surprised that in spite of everything, there could still be some strong startups announcing funding rounds.

So, what happens if you already have a startup or are thinking of starting up in this scenario of gloom and doom? And why just a startup, all SMEs would also have similar, if not exact, problems. Focus on your business plan and aim for strong metrics built on sensible business decisions. Reduce the bleed, tighten purse-strings, and spend on what's most essential. Prepare to be lean, mean, fighting machines for at least 18-24 months. If you have been keeping an eye on the good ol' P&L statements, then you have less to worry about. We are not yet in the woods, but we may soon be. Finding the path out of the woods will depend on the founders who are leading the way.

The writer is an author and media entrepreneur. Views expressed are personal