The cardinal principle of running a venture on sustainable business practices is gaining traction, prompting a recalibration of the growth-profitability balancing act, which is a great positive.
Illustration: Chaitanya Dinesh Surpur
While winter has started approaching globally in the northern hemisphere, the funding chill in the venture capital world is being felt for over 1.5 years now. The boom of late 2020, 2021 and some part of 2022 is so strongly ingrained in the minds that it has been hard to accept the vicious drop in funding pattern.
However, underlying this funding chill are compelling factors that validate the investment narrative. For instance, amounts committed by LPs (Limited Partners) towards India and SE Asia over the last 1-2 years are sizeable and large, and hence significant amount of dry powder is waiting to be deployed in the ecosystem. The fact that, in one of the earlier years, the total amount raised through PE/VC (private equity/venture capital) channels in India was higher than that raised via IPOs tells us the importance of this form of financing. The acceptance this has achieved in the last decade or so over being also-an-option is now strongly established. From being a tech-focussed avenue to now any and every sector looking for PE money, this has been a fantastic learning journey and fully embedded in the economy’s ecosystem.
The contemporary landscape is witnessing transformative shifts in PE investment strategies and startup management approaches. Many startups are gunning for profitability, and few are profitable already, which is a departure from the earlier approach of growth-at-any-cost. The cardinal principle of running a venture on sustainable business practices is gaining traction, prompting a recalibration of the growth-profitability balancing act, which is a great positive.
As more startups attain profitability and positive cash flows, the overt dependence on continued funding diminishes. Consequently, companies are redirecting focus towards building businesses rather than incessant fundraise efforts. Conversations within the industry are shifting from unit economics to profitability, long cash runways, and to a holistic perspective on performance metrics.
PEs and VCs are adopting a more cautious stance towards cash guzzling and cash-burning businesses. It is so much more critical now—creating the right kind of tech with lesser dollars, creating consumer connect through the best of products, services, and customer care practices. The spotlight is also on optimising on spends, as well as targeting superior & sharper returns. This can be achieved by taking a simplified approach to metrics, tied in with a versatile strategy, building purpose-driven teams with exceptional execution skills. So much more can be done by being mindful of every aspect of business-building and creating customer-focussed practices.
The battle for startups to raise their rounds of funding can be taxing. This involves not just time and effort but a certain concoction of emotion, uncertainty all woven together, leading to a feeling of excitement as well as stress.
The battle is won once the process of fundraise gets completed. But, in some ways, the quest of winning the war has just started. Now is the time to look at your array of possible strategies, and the need to pick and decide the direction to turn to, the initiatives to be kindled, and press the pedal. Many companies who are at this stage are wanting to tread a more cautious path, having burnt in the past in many ways. If this is not your first round of raise, you are perhaps wiser on how and where to deploy, which areas to strengthen, and how to win the war with lower losses keeping the ship sailing comfortably in high and low seas, and for longer periods of time.
There are the eight pillars of strength which need to be built if you have to sail high and long. The essence of stable businesses is given much more credence, whether you have a long path or even an early exit in mind, as that’s the real underlying and long-lasting value one is creating for the organisation and for all stakeholders.
For startups and organisations that are low on capital, there are many lessons to be imbibed. The best practices have emerged during survival times, which makes the organisation stronger and wiser. The real importance of cash flow and cash conservation thus dawns. There are numerous examples of companies in sectors like consumer, health care etc which have been able to demonstrate growth as well as turn profitable during times of low capital. This is when real out-of-the-box thinking happen and, hence, necessity is the really the mother of inventions. No amount of preaching works but all learning happens on self-mode when you are actively seeking solutions.
It is also seen that the importance of investment committees is so much higher now as they are the guiding force in many ways. These committees act as guiding forces focussed on capital allocation, stringent fiscal considerations, as well as validating the fundamentals of a business. There is strong merit in every player in the system thinking about the best ways of resource utilisation and make the venture more compelling for the customer and, hence, for the investors. It appears that there is a much saner sense prevailing in the system, which are opening up minds and inculcating better practices. And governance is getting better understood and being imbibed too.
In this era of heightened financial mindfulness, the impetus is on crafting compelling narratives that align with the tenets of purpose-driven leadership, superior execution, and consumer-centricity. As the industry gravitates towards these principles, it fortifies the notion that irrespective of market fluctuations, robust and purposeful enterprises will continue to find support and thrive in the dynamic landscape of PE/VC funding as well as overall business stability and growth.