Warmth on offer only for sustainable business models in funding winter

When phrases like ‘funding chill’ and ‘startup winter’ have been run ragged over the past few months, the timing of the Forbes India Special Issue on venture capital (VC) may appear counter-intuitive. After all, this has been a year in which overall funding—for early and growth-stage ventures—has plunged by almost half, from $41 billion in 2021 to $21.3 billion in the first nine months of the current year. And there are few signs of warmer climes, even as much of the country descends into wintertime, of the climatic kind.

A natural fallout of purse-strings tightening is startups gasping for breath, particularly those in growth mode and on a high cash-burn rate. The much-heralded unicorn club isn’t quite hibernating but there were fewer members joining the elite band of ventures valued at $1 billion and over—from 48 unicorns in 2021, India has had 21 till September 2022.

The numbers sourced from startup data firm Traxcn by Rajiv Singh—who has put together this fortnight’s VC package—are not all grim. Although late-stage funding has slumped, from $8.7 billion in this year’s first quarter to $1.4 billion in the July-September quarter, the silver lining hovers clear and bright over the early-stage pack. Till September, pre-seed, seed and Series A funding was holding up well, at $7 billion as against a peak of $8.7 billion in 2021.

The message here is clearly that funding may slow down but it won’t grind to a halt. Funders will become prudent, the funded will be cautious with capital and younger ventures with sustainable business models will attract the funding they deserve.

The challenge for the VC community is to discover the viable ones, and dodge the potential flameouts. Perhaps in heady times when liquidity is ample, such discretion may be critical; today, spray and pray is a sin, and VCs have gravitated from GMV and top line multiples to more pertinent metrics involving earnings and margins. Winter can be chilling, but more so if you are on thin ice.