From layoffs to cost-cutting, start-ups brace for long funding winter

Business

On a cloudy Monday this month, Mohammed Irshad flew from Kochi to Gurugram to attend an exclusive investor networking event.

Among a handful of founders selected for the event, Irshad was to pitch his peer-to-peer learning start-up Notespaedia for funding in front of top venture capital investors such as AngelBay, Elevation Capital, and Inflection Point Ventures.

He failed to woo them, but the feisty entrepreneur was determined to continue his hunt.

On Tuesday, he flew to Bengaluru to attend Nasscom Product Conclave, competing with hundreds of other start-ups for investors’ attention.

“The feedback we got from venture capital investors is that they don’t want to invest in edtech at the moment,” said Irshad.

“Start-ups are experiencing a funding winter, and it has become more (challenging) for edtech companies compared to other segments,” added the chief executive officer (CEO) of Notespaedia, which has built a community-driven next-generation platform that provides digital handwritten notes for all entrance preparatory needs.

Indian start-ups raised $3 billion in Q3 2022 (July-September), which was 57 per cent lower than the previous quarter, according to a report by market intelligence firm Tracxn.

This was also 80 per cent lower than the peak funding of $14.9 billion received in the same quarter last year.

“India is currently experiencing a funding winter, which is expected to continue for the next 12-18 months,” said Neha Singh, co-founder, Tracxn.

“Companies are trying to reduce their expenditure on fixed assets like working spaces, electronic devices, and advertising.”

This is reflected in the sombre look of many pubs and restaurants at Bengaluru’s start-up hubs such as Koramangala, Indiranagar, HSR Layout, and MG Road.

Not long ago, pubs and restaurants such as The Bier Library, Toit, and Biergarten were bustling with start-up founders and their employees.

Company insiders said earlier founders used to book the entire pubs and throw parties for achieving various milestones by employees such as completing a sales target or closing a funding round.

They were even taking employees on many offsite trips. Such activities have drastically reduced.

Now, founders of various soonicorns and unicorns can be seen at cafes like Starbucks and Third Wave Coffee in Koramangala and Indiranagar meeting investment bankers and mentors and discussing strategies for raising funds and achieving profitability amid this environment.

They are now spending more funds on improving the quality of their products and services for long-term profitability and revenue generation.

The scenes are similar in Gurugram, another start-up hub.

Shivani Sharma (name changed), who works in a fine arts and décor valuation firm in the city, said through 2018 and 2019, most lunches with the clients were held in restaurants like Barbecue Nation, Daryaganj Restaurant, or Amaranta.

The staff would often be provided cabs to commute to such lunches directly from homes.

“Now, with fund crunch and major pandemic-related changes in work culture, most of our meetings are held virtually,” said Sharma.

She said the management even sent a mail explaining the need to cut down on expenses over costly lunches and “non-essential” travel expenses.

Eateries like Farzi Cafe, Nando’s, and Yetis in Gurugram’s Cybercity, which used to be the favourite haunts for start-up lunches, now witness a much thinner crowd between 1 pm and 3 pm compared to 2019.

Similarly, the near-incessant stream of cabs in front of major office complexes in the area has been replaced by a throng of rickshaw pullers, as employees dart to and fro the nearest metro stations.

“The mood is depressing,” said Meenakshi Ravikumar, chief executive officer of Smart Veinte, a Bengaluru-based firm which undertakes interior designing for residences and offices.

Ravikumar had to collaborate with her spouse to run Smart Veinte.

She was actually running a placement company which she had to keep on the back burner after facing losses, including her personal investment.

This is because her clients started laying off employees due to the impact of Covid-19 on their businesses.

Experts warn the situation may worsen in the coming months.

Deep tech companies, especially early-stage firms, which are already getting a lesser share of the overall funding in the ecosystem, may face the heat, they say.

“Deep tech needs patience and gestation time. That is where you need investors who understand that mindset,” said Saurabh Chandra, co-founder and CEO of robotics company Ati Motors, located not very far from Amazon’s main office in the northwest neighbourhood of Bengaluru.

Chandra had to put a lot of his personal money to build his second venture Ati Motors, which makes autonomous robots for factories and warehouses and counts firms such as Flipkart, Bosch, and Hyundai among its customers.

“You can’t make autonomous robots with a $200,000 seed funding,” said Chandra.

He said that in this environment, the government could play a huge role in supporting deep tech firms in terms of buying their products.

Top VC investors said the funding winter would impact late-stage companies more than early-stage firms.

The recent energy crisis in the UK and Europe and also the sliding pound and euro have increased the likelihood of a global recession.

“The funding winter is mainly (impacting) growth-stage companies — firms which have raised Series C, D and E, where people wanted crazy money to burn and build,” said Shekhar Kirani, partner at VC firm Accel, which has led investments in top tech firms such as Freshworks, Browserstack, and Chargebee.

Serial entrepreneur and investor Ravi Gururaj said mid-stage firms are likely facing the compression as they are much more sensitive to the impact seen in the public markets.

“I hope early-stage companies would be a little more impervious to the funding winter,” said Gururaj, who is the founder of six technology ventures, two of which were acquired by Nasdaq companies.

“Good companies will still get funds, but it might take a little longer and they may see lesser valuations,” he said.

Experts said many unicorns, or start-ups with over $1 billion valuation, are trying to make their expenditures very efficient.

They are striving to have enough cash to stay afloat for a minimum of 36 months without having to raise additional funds.

“Some of the unicorns have also resorted to cutting jobs and shutting parts of their operations to shore up their balance sheets,” Singh of Tracxn.

For instance, SoftBank-backed edtech unicorn Unacademy is focusing on profitability and it has plans to go for an IPO in the next two years.

The founders have taken a salary cut; complimentary meals and snacks across offices have been done away with; and “certain businesses” are being shut down.

Also, there is no business travel for anyone, including top executives.

Earlier this year, the Bengaluru-based firm laid off more than 1,000 employees.

Unacademy’s chief rival Byju’s is set to lay off nearly 2,500 employees as part of an “optimisation” plan.

In June, Byju’s laid off about 600 employees at its group companies WhiteHat Jr and Toppr.

“With the external circumstances being tight, you need to respond like ‘consolidate’ and ‘rationalise’ wherever it is required, unlike the Covid time where capital availability was much higher,” said Vamsi Krishna, CEO and co-founder of edtech unicorn Vedantu.

“There are going to be a lot of downsides and layoffs.

“However, these are the times when strong companies would emerge,” said Krishna.

Vedantu itself laid off 724 employees this year, according to sources.

It is not just layoffs, attrition rates too have increased at tech firms.

“Some employees perceive the reduction in perks as an early symptom of impending job cuts and downsizing and decide to jump ships,” said Divesh Sood, founder of compliance training firm The Next Consultants.

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