😥 Funding Crunch to Hit Indian Startups?
Startups could soon face a cash crunch with two major VCs pulling out of the market.
Unicorns, decacorns and soonicorns. They don’t sound that unique, no?
That’s because the funding flowed so freely over the last few years that one could almost forget that a deadly pandemic had been raging and millions were facing a financial crisis.
But now this magic funding well may be drying off.
Two of the largest venture capitalist funds, SoftBank’s Vision Fund and Tiger Global are now planning to go conservative with their bets.
They have lost massive amounts of money: Tiger Global saw losses worth $17 billion (two-thirds of its gains since it was founded in 2001) while Softbank’s Vision Fund lost $27 billion.
What’s behind these massive losses? Let’s take a look.
😲 SoftBank Goes Soft, Tiger Loses its Roar
Both Tiger Global and Softbank had been in the limelight lately, thanks to the massive deals they have been making.
SoftBank accounted for 10% of all money that went into Indian startups last year, while Tiger Global has already invested $12.7 billion in startups worldwide this year.
Now such massive spending has become a little common in the past few years, thanks to the easy money these funds were getting because of low-interest rates (lower interest rates make borrowing cheaper, increasing cash flow in the market).
But still, the amount of money these giants were spending was unprecedented.
Why?
This has kind of been part of their strategy.
You see, startups are famous for failing.
And this fact does not change once startups get VC funding.
75% of all VC-backed startups also fail.
Wait, then doesn’t this spending spree seem absurd?
Actually no.
You see, even if ¾ of their investments fail if VCs bet on the one right startup, it can make up for all their losses.
For instance, SoftBank invested $30 million in Alibaba in 2000 and when the company went public in 2014, Softbank’s stake was worth $50 billion.
But finding the right startup is like finding a needle in a haystack.
Solution? Buy the whole damn haystack.
That’s exactly what these funds do, invest in as many startups as they possibly can and hope for the best.
For instance, here’s how Tiger Global operates:Â
It offers money to startups that aren't even looking to raise funds. It gives more than what a startup is worth.
It invests in directly competing companies, like Byju’s and Unacademy, Dream11 and My11Circle, Groww, and Upstox, unlike traditional VCs who find this move wasteful.
And for quite some time this approach was working well.
Until the Russia-Ukraine war, the interest rate hikes, and the Chinese lockdowns happened all at once.
These events have caused the stocks of tech companies (in which these two funds had invested) to plunge, leading to major losses.
Especially SoftBank’s Vision Fund which had bet heavily on Chinese companies, especially ride-hailing startups (which the Chinese government cracked down on).
Paytm was another major loser on the company’s portfolio.
So, these firms have now decided to go conservative and cut down on their irrational exuberance.Â
SoftBank is cutting down investments by 50%, while Tiger Global is also rethinking its strategies.
Now, this could be a problem for startups, especially Indian startups in whom SoftBank had pledged to invest $10 billion this year.Â
🚀 The Startup Problem
A lot of Indian startups had gotten used to the idea of raising easy money at insane valuations.
And because they had access to an insane amount of cash, they developed unsustainable business models in which they first focused on burning cash and getting users and then making profits.
Now, this cash is running out fast.
We’re already seeing the impact of drying VC funds in the edtech sector, where companies like Unacademy, which were once VC favourites, have to lay off staff to cut down costs.
Fintech firms, especially those in the lending business, are also going to have a really tough time ahead.
Not only will they have to deal with drying funds, but their business will also reduce thanks to the increasing interest rates.
Don’t worry readers. It's not all gloom and doom. There is a silver lining to this cloud.
🥛 Glass Half Full
You see, startup funding as a whole is not going to stop, it simply cannot.
But now VCs, even the bigger ones with lots of cash, will be careful about where they’re investing money.
They’ll look closely into whether a startup is sustainable or not and if it actually deserves that insane valuation it is asking for.
And this will benefit us retail investors in the long run. How?
You see, companies like Paytm had insane valuations before going public.
But since their fundamentals didn’t support such high valuations, their IPOs tanked, and retail investors lost their money.
However, if they are valued more conservatively now, there are fewer chances that retail investors will see losses.
Plus, with less VC cash coming into their kitty, a lot of these startups will have to go public sooner or opt for other fundraising methods that involve retail investors.
This again will benefit retail investors because unless startups raise money from the public, only VCs benefit from their success.
Never thought we would say this, but less VC money in the startup ecosystem could be good for all of us.
Now all that’s left to see is which startups can survive the cash crunch and which will die out.
⚡ In a line: Two major VCs have decided to pinch their purse strings, possibly causing issues for upcoming Indian startups.
💡 Quick question: Which sector do you think will be the most impacted by this funding crunch?
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Will this have any larger impact on the liquidity of the startups. Although they might plan into going public but is there enough liquidity, post the LIC IPO, in the market?