Examining the origins of the term
The idea of calling a slowdown in funds “winter” can be traced to the 80s when there was a reduction in investments made for developing AI; this was called the AI winter. The winter analogy has also recently been used to describe the infamous Crypto crash of 2021 caused by the Chinese crackdown on the instrument. Currently, the analogy is being used to describe a reduction in startup funding to indicate that growth in startups will freeze without VC funding. The term has a pessimistic connotation that implies bad times for whatever it is used to describe.
Reasons for the apprehension
Indian startups are on a firing spree to cut costs. The Ed-tech segment has attracted a lot of attention in this regard in 2022. With Byju’s sacking 5 percent of their workforce, rivals Vedantu and Unacademy also followed suit. All of them cited cost optimisation as a reason for the layoffs. There has also been a fall in the number of startups turning into unicorns and a drop in the number of existing unicorns as well. These drastic cost cuts are a reaction to funding inflow slowing down. The amount collectively flowing into Indian startups has come down by 32 percent from last year. An inspection of the previous six quarters is not a pleasant one either. A consistent downward trend in the funding amount has also been observed, with a 28% year-on-year decline.
Some believe that the reduction in funding results from overvalued startups becoming the norm, investors losing faith in startups, or a collective failure of the Indian startup ecosystem to provide tangible value. While these fears are valid in the current climate, there may not be much truth to them. Let us take a look at what the major factors are behind this slowdown in funding.
Long winter or light flurry
All assets and instruments go through business cycles. The downtrend in these cycles have been observed in 2008 and 2016 as well, but the impacts were not lasting. In the course of these cycles, rising and falling are natural for funding inflow, growth, and profits. One must also note mitigating factors in the global economy like the armed conflict between Russia & Ukraine resulting in scarce energy supply, the depreciating Pound in the wake of Brexit, and rising inflation.
The above factors have raised fears of a recession and resulted in central banks around the world raising interest rates. With these fears and the unstable state of global affairs, investors are naturally going to be more conservative with funds, irrespective of a startup's inherent value. While the situation is not ideal, some startups have managed to raise record amounts of capital, indicating that business models that provide value do not have a “winter” for funding.
Preparing for the possibility of a funding winter
While the probability of a full-fledged funding winter is low, it is still a possibility that needs to be planned for. Here are some tips that will help startups survive a funding winter.
1. Collaborations and strategic partnerships:
Teaming up with other startups that provide complementary goods or services can help increase market share and cut costs. This can additionally result in creating a mutually beneficial ecosystem consisting of startups in the same segment.
2. Research alternative means of getting funding:
Low funding inflow from traditional investors is not the end of the world. Explore alternative options for raising funding. There is a range of ways to go depending on what the funding is needed for. Find the right fit for your startup and go ahead with them.
3. Find cost levers:
Analyse your operational procedures to find the least necessary expenses that can be optimised or dropped altogether. Find free alternatives to tools used for communications, operations, and other daily interactions.
4. Find ways to generate extra sources of revenue:
Do not depend on your primary means of the business alone to stay afloat. Utilise company assets and resources to generate secondary streams of business. Innovating and adapting to changing circumstances define a startup's ability to sustain and scale up in the long run.
5. Space for alternate finance:
With the drop in funding from traditional investors, a gap is created between startups in need of funding and the funds available. This creates an opportunity for alternative methods of financing to make their mark by helping cover the gap. The global alternative financing market size was valued at USD 6.62 billion in 2021 and is anticipated to increase at a CAGR of 6.3% from 2022 to 2028. Perhaps these methods will play an important role in thawing the “funding winter“ and helping startups reach their full potential.
Within this sector, Crowdfunding is the most impactful method, with a revenue share of around 85% in 2021.
CrowdInvest is a cross-border equity crowdfunding platform offering UK-based sophisticated investors opportunities to invest in impact-driven, high-growth tech startups from emerging markets. Fundraisers will be able to consider how to employ any of these other added benefits of crowdfunding that we have outlined here, plus the major benefit of acquiring customers as well as raising investment funding. You can join the waitlist today at https://www.crowdinvest.com/ to stay up to date with developments on how to be involved.