ETtech State of Startups Survey: Conserve cash, cut burn, turn profitable

This was the common refrain among India’s top founders, investors and internet executives in ET’s annual State of Startups survey.

The poll, which sought responses from over 60 key people, comes amid one of the worst downturns for the technology industry globally.

As companies tighten their belts, 64% of respondents said the funding crunch may ease in the second half of 2023, while 21% felt it could become worse; 14.8% said the environment will remain the same as this year.

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Investor skittishness has made most founders with adequate cash runway say they would avoid fundraising for the next six months. Around a quarter of them said they may still consider trying to mop up new capital.

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Last year was a
fundraising record for Indian startups, when 40 new unicorns (private firms valued at $1 billion or more) were birthed. However, over the last six to eight months it has been a battle for survival, founders and investors said.

“2022 has been a learning for all stakeholders in the startup and tech sector, which was probably swayed by the influx of large volumes of funds in the previous years. It didn’t take long for people to realise the influence of macroeconomic and political factors of a globalised economy in impacting investor sentiment across the world…,” a startup founder who participated in the ET survey said. “Thinking for the long term is extremely important than pursuing the short term.”

Funding for startups this year stood at $23.7 billion as of December 21, compared to $35.46 billion racked up last year, according to data platform Venture Intelligence.

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In short, the exuberance of last year has given way to extreme caution amid geopolitical uncertainty due to the Ukraine conflict and interest rate hikes by the US central bank.

The biggest takeaway for 2022 has been to ‘do fewer things, conserve cash and focus on profitable growth,’ said one founder on condition of anonymity. “De-couple your business and strategy in anticipation for the next funding round,” another entrepreneur added.

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The poll, conducted over three weeks, highlights how the startup ecosystem has been reacting to the so-called funding winter.

About 87% of those polled said they would not shy away from shutting down unviable businesses and restructuring their organisations.

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“Moving up every revenue-driving initiative and retiring every non-essential cost,” said Saahil Goel, founder of logistics aggregator firm Shiprocket, on being asked about his priorities as an entrepreneur in 2022.

Goel said the “focus is on building a business profitably”.

Core business, profits

“Focus on core markets and products along with better unit economics, and scale up what’s working,” said Varun Alagh, the co-founder of direct-to-consumer startup Mamaearth.

Gurugram-based Mamaearth clocked Rs 943 crore in operating revenue in FY22 and a profit of Rs 14.4 crore. It plans to
go in for an initial public offering (IPO) next year. At a $1.2 billion valuation, the startup is among the most valued D2C brands in India.

The markets have reset, the ecosystem is in a different era and there is no going back, said VT Bharadwaj, general partner at Mumbai-based investment firm A91 Partners.

“If you have product market fit (PMF), and cash in the bank, aggressively invest to take share; if you don’t have a product market fit, retool, cut back on cost and experiment and if you don’t have a business model, aggressively cut back cost; go back to the drawing board on business,” he said. “Assume no capital is available for the next three years.”

PMF, he said, happens when unit economics works.

“…and the reason it works is because demand is getting created through pull by fulfilling a customer need and not by push through discounts and performance marketing,” Bharadwaj added.

Not growth at all costs


Several consumer-focused startups have had to cut down marketing spends to conserve cash.

“Growth at all costs isn’t something we have followed historically, and neither are we going to do so in future. We plan to stay frugal on our cash utilisation and will ensure there is heightened awareness about it,” said Tushar Garg, founder of electric vehicle firm BluSmart.

BluSmart will not, however, cut back on hiring. “We will hire for the right reasons,” Garg said.

Growth and profitability are not mutually exclusive, and they need to work in tandem, said Siddarth Pai, founding partner at early-stage venture fund 3one4 Capital, an investor in unicorns like meat delivery startup Licious and neobank Open.

“Capital preservation is still key, with frugality becoming the norm as opposed to the exception; fundamentals are back in vogue and will remain so for the near future,” he said.

IPOs only for profitable firms

Last year, another big theme was startup initial public offerings (IPOs).

However, six months into their public market debuts, most new-age stocks like Zomato, Paytm, Nykaa, and Policybazaar
had taken a major beating on the bourses amid a larger rout in tech stocks globally.

Taking the gloomy picture into account, close to 47% of those surveyed said a listing may become viable for local startups only in 2024.

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“IPO markets are open now for profitable new-age companies. Governance and profitability will be key themes for 2023,” said Mohan Kumar, managing partner at Avataar Ventures, a Software as a Service and enterprise-focused growth-stage venture capital firm.

Listed firms like Freshworks are trading at a market capitalisation of $3.72 billion presently, compared to $13 billion when it listed on the Nasdaq in September last year.