Unicorns are passé, cockroaches are the new favourites of venture capitalists

  • Cockroaches are startups that can last for a long time Winter financingLike pests that can live through nuclear war.
  • According to experts, most startups go through the beetle stage at least once and gain experience and knowledge as well as their business strategy.
  • Experts say that for those startups that cannot survive without foreign capital, the future is bleak, leading to mergers, acquisitions and, in worse cases, even closure.

India’s startup ecosystem has been maturing, but it’s cooling off as investment winter sets in. In this environment, venture capitalists (VCs) have shifted their focus from unicorns – companies valued at $1 billion, to cockroaches – companies that can survive the test of time. The name is a reference to the fact that cockroaches would survive even a nuclear war.

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Anirudh A Damani, CEO of Artha Group, defines Susk as a start-up that does not need external support to survive. “It can run forever on the cash it makes from selling its products or services at a profit — something a loss-making startup can’t do because its biggest customer is a venture capitalist,” he says.

Struggling to get funding is not an unknown challenge for most startups starting at the early stage. However, this time around a long investment winter has begun and is expected to last between 6 and 18 months according to many experts. According to Venture Pulse, funding began to dry up six months ago — falling to $2.7 billion in the quarter to September 2022 from $15.9 billion in the year-ago quarter.

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Experts say that a good startup can survive through these changing dynamics. Startups that follow Soski’s approach persist despite changing market conditions, environments, and investment scenarios. Mitesh Shah, Partner at Physis Capital said: Most startups go through the beetle stage at least once and gain experience and knowledge as well as their business strategy despite changing market conditions.

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To ensure that a startup becomes a beetle, businesses must make hard changes to their models – founders must shift their focus from valuation to cash flows.

“Those unicorns sitting on cash will always survive, but those at the end of their runways will struggle. “However, the good thing is that because of these times, companies are starting to focus on businesses in terms of unit economics and the path to profitability rather than just looking at fundraising and valuation nonsense.” .

Unicorns are passé, cockroaches are the new darlings of venture capitalists

A sustainable unit economy is key

For the VC ecosystem, which has seen its fair share of hits and misses, the funding winter will be an acid test. “During these winters, businesses that solve a fundamental human problem thrive at the expense of companies that buy revenue at a deep discount, leading to an unsustainable unit economy,” Damani says.

For those startups that cannot survive without external funding, the future is bleak, leading to mergers, acquisitions and, in worse cases, even closure.

“In the current environment, where funding parameters have tightened and valuations are under pressure, startups (founders and their investors) are looking for alternative survival strategies. “Some startups that are heavily dependent on funding for survival and growth tend to be prone to risky sales or shutdowns.”

Sectors like edtech that have raised a lot of capital during the pandemic are struggling to overestimate their TAM, or total addressable market. Those consumer-facing segments that represent the “need” to spend money to acquire customers may reduce a startup’s ability to become a beetle.

“Since their marketing spend is key to customer onboarding and a significant contributor to burnout, unless they can transition to models that can sustain existing business operations without discretionary marketing spend, such businesses are likely to be the most They are in trouble.” Bansal, co-founder and director of BlackSoil.

Unicorns are passé, cockroaches are the new darlings of venture capitalists

Late stage startups are in most trouble

Experts say that beetles that intend to survive must also lower their valuation expectations. This is especially true for late-stage startups, which need more funding and also need to show a path to generating cash.

According to Shah, with valuations resetting and a renewed emphasis on profitability, late-stage startups will have the most difficulty obtaining additional investment. There should also be moderation in valuation expectations, in line with changing market dynamics.

Good companies will certainly have access to capital, but will have to accept higher valuation multiples. For efficient markets, some correction in multiples is required from time to time. But yes, many companies are and should be receptive to strategic outcomes from larger peers or established companies.”

Unicorns are passé, cockroaches are the new darlings of venture capitalists

How to become a cockroach?

Sharma believes that Indian startup founders will be guided by their strong survival instincts. They are cutting costs to make sure they have longer bands. Some companies have actually shown improved unit economics, he told Business Insider India.

According to Shah, many of those who may fail the test are those who have a utopian vision of progressing beyond their capacity. Beetles must have fundamentals such as product demand, short product development cycles, and controlled capital expenditures.

One of the key components of a successful cockroach startup is focusing on the target market or target market, at least early in its journey. A targeted, long-term business concept and a captive market are essential to becoming a successful cockroach startup. A value proposition is crucial if an organization wants to reach its target customers. A company needs a distinctive selling proposition in a business to get investors to reach into their pockets, says Shah.

Bansal believes that a strong focus on fundamentals and cash flow is essential – Beetles are the kind of startups that can eschew growth at all costs and focus on capital efficiency. Most VCs also say that it is the founders who have to experience mental changes along with the startup.

Majumdar lists the qualities of a good Beetle that can grow when funding is slow: “The survival instinct of the founders, the ability to change the business to a profitable path, inherently low and not in the business of building a profile for the sake of it. ”

See also

Tata’s mega-aviation merger is ready to fly, but the sky is not clear yet

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