My thoughts on potential funding winter for Start-Ups

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Recently, Sequoia Capital presented a very cautious approach in a 51 page note for founders to manage their companies. Similarly, Y Combinator has also warned its portfolio companies to “plan for the worst” amidst worsening macroeconomic environment and sharp correction in tech companies. Both the letters signal a potential funding slowdown, hence the need to focus on profitability and unit economics has been emphasized in both the letters.

Considering the above-mentioned letters, I have tried to present my views on some key questions which I believe are present in the minds of various stakeholders forming a part of the start-up ecosystem:

Do we believe valuations have corrected enough to attract value investors?

For early-stage investment upto series A there is minimal correction for good companies.

Do good companies continue to raise funds?

Good companies with great management and good business model with frugal thinking and being agile will continue to be backed with minimal/no correction in valuation and in very few cases there is an uptick in valuation. As I have always maintained for most start-ups, cash is king  so we must be cautiously optimistic while spending money and remain focussed and disciplined.

Has the liquidity dried up?

Enough liquidity is available across different classes of investors.

Is there an interest in certain sector more than the others?

Companies in the chosen sector which is flavour of the day are unlikely to miss out on funding.

Is storytelling as important as it was in the recent past?

I think this will never go away, as storytelling attracts believers who think long term and have a similar time horizon as of founders. The believers will continue to focus on long term impact and companies that are driven basis profit with purpose and not profit as purpose.

Should founders focus on dilution or valuation in the current scenario?

While most investors believe that founders should not dilute, I believe value-creation is more important than both valuation and dilution.

The above views are based on my last three years of private market investing and therefore there may be some biases as I am extremely optimistic, believe in exponential thinking and am of the opinion that there is always more than one right.

In summary founders should continue to remain optimistic driven by purpose and values while continuing to be alive and agile to the evolving economic scenario and geopolitical situation.

May 2022