- Cockroaches are startups that can survive for a long period of time
financing winterlike the vermin that can endure nuclear war.
- Most startups go through the cockroach stage at least once, gaining experience and knowledge and strategizing their business, experts say.
- For those startups that can’t survive without outside funding, the future looks bleak, leading to mergers, acquisitions and, in the worst cases, even closures, experts say.
The Indian startup ecosystem is maturing, but it is also getting chills with the start of the funding winter. In these circumstances, venture capitalists (VCs) have shifted their focus from the 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 are known to survive even nuclear war.
Anirudh A Damani, CEO of Artha Group defines a cockroach as a startup that needs no external support to survive. “It can run forever on the money it generates by selling its products or services at a profit — something a loss-making start-up can’t afford since its largest client is the venture capital investor,” he says.
Competition for funds is not an unfamiliar challenge for most startups from the pre-seed level. This time, however, a long financing winter has arrived that many experts say will last between 6 and 18 months. And funding started to dry up six months ago — according to a Venture Pulse report, it dropped to $2.7 billion in the quarter ending September 2022, from a peak of $15.9 billion in the year-ago quarter.
A good startup can survive through these changing dynamics, experts say. “Startups that take the cockroach approach survive despite changing market conditions, environments and investment scenarios. Most startups go through the cockroach phase at least once, gaining experience and knowledge and strategizing their business despite changing market conditions,” said Mitesh Shah, partner at Physis Capital.
In order for a startup to become a roach, companies will have to radically change their models – founders will have to shift focus from valuations to cash flows.
“Those unicorns that are on money always survive, but the ones at the end of their runway are struggling. However, the good thing is that in these times companies have started to focus on the businesses in terms of unit economics and the path to profitability rather than just looking at fundraising and vanity valuations,” said Bhaskar Majumdar, managing partner, Unicorn India Ventures.
Sustainable unity economy is key
For the VC ecosystem, which has seen many hits and misses, the funding winter will be a severe test. “In these winters, the companies that solve a basic human problem thrive at the expense of those that buy revenue under the guise of big discounts, leading to an unsustainable unit economy,” says Damani.
For those startups that cannot survive without outside funding, the future looks bleak, leading to mergers, acquisitions and, in the worst cases, even closures.
“In the current environment, where funding parameters have tightened and valuations are under pressure, startups (their founders and investors) are looking at alternative survival strategies. Some startups that rely heavily on funding to survive and grow often tend to do emergency sales or close ship,” Majumdar said.
Sectors like edtech, which raised a lot of money during the pandemic, are also in trouble because of overestimates of TAM or the total addressable market. Those consumer-facing industries that show the “need” to spend money to acquire customers can also reduce a startup’s ability to turn into a cockroach.
“Since their marketing spend is essential to customer onboarding and a major contributor to burn, unless they are able to pivot to models that can support existing business operations without discretionary funding, it is very likely that such companies will be in the most trouble. marketing spend.” Bansal, co-founder and director of BlackSoil.
Late-stage startups have the most problems
Cockroaches planning to survive will also have to adjust their valuation expectations, experts say. This is especially true for late-stage startups, which need more funding and also need to show a path to monetization.
According to Shah, late-stage startups will struggle the most to get additional investment as valuations reset and there is a renewed focus on profitability. Valuation expectations also need to be tempered in line with changing market dynamics.
“Good companies will certainly have access to capital, but they need to be more accepting of the valuation multiples. Some correction in multiples is necessary for efficient markets, every now and then. But yes, many companies have and should be open to strategic outcomes from larger peers or established companies,” said Apoorva Sharma, partner at Stride Ventures.
How do you turn into a cockroach?
Sharma believes founders of Indian startups will channel their strong survival instincts. “They are cutting costs to make sure they have longer runways. Some companies have shown improved business economics,” she told https://londonbusinessblog.com/ India.
According to Shah, many of those who might fail the test are those with utopian visions of scaling beyond their capabilities. Cockroaches must have solid fundamentals such as product demand, a short product development cycle and controlled capital expenditures.
“An important part of a successful cockroach start-up is targeting a specific niche or target market, at least early in the journey. A focused long-term business concept and a closed market are needed to become a successful cockroach start-up. A value-based proposition is crucial if an organization is to reach its target customers. A company needs a distinctive sales proposition in the company to get investors to reach for their pockets,” says Shah.
Bansal believes that a strong focus on fundamentals and cash flows is essential – cockroaches are those startups that can avoid the concept of growth at all costs and focus on capital efficiency. Most VCs also say it’s the founders who will have to go through the mindset change along with the startup.
Majumdar lists the traits of a good cockroach that can thrive when funding is slow: “Founders survival instinct, ability to transform the company into a clear profitable path, inherently low-key and not in the company to build profile for the sake of it.”
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