The startup ecosystem is not in the highest of spirits. US tech companies battling a recession, global inflation, and the Russia-Ukraine war have clearly invoked a ‘setback sentiment’ in the ecosystem. However, when it comes to private markets, crisis-induced times can potentially be one of the most promising times to invest..
At LetsRaise with Peyush Bansal, an initiative of LetsVenture, in association with IDFC First Bank, Manu Chandra, Founder and Managing Partner at Sauce.vc, claims that funds looking at consumer businesses have never been more bullish, citing that numbers concerning sales, demand-supply chain on the ground are better than ever.
“This is the best time to be investing if you are looking at a five to seven year’s timeframe. Now is when you will find companies that are building super sustainable business models. They will not be building for the wrong metrics,” he said, adding that Sauce.vc just closed its second fund and is looking to invest aggressively through this year and the next.
“It is a time where the strong will become stronger and those which are fundamentally not sound will become weaker,” said Govind Shorewala, Founder & Managing Partner of Fairangels.VC.
While there is a lot of talk around funding drying up in the ecosystem, Shanti Mohan, Founder and CEO of LetsVenture, says data from our platform suggests otherwise, having sealed 85 deals worth Rs 100 crore in 40 days on LetsVenture.
“I think that what will fundamentally change is that a founder who started up just to raise capital is going to go away whereas founders solving a critical problem, building a business, and one who understands the purpose will continue to thrive,” she said.
Shanti believes that downturns typically serve as a good environment to start a company. She said, “Early stage ecosystem is very insulated because you will see the returns only in five to seven years. This is the best time to start a company because when you start with a trough, you can only go up.”
She was speaking at a panel discussion on Strategies On How To Navigate The Current Economic Environment at Let's Raise, an exclusive event in Delhi on June 11, 2022.
Here are some excerpts and key takeaways for founders and investors alike:
Don’t overcapitalise early-stage founders
Too much capital takes away a startup or an entrepreneur’s discipline, according to Manu. At the same time, he said that excessive dilution at an early stage makes it a slippery slope for the founder to build the company further.
“Be conscious of their dilution and be conscious of your exposure to the company. Invest as needed, only the right amount. That becomes a win-win partnership,” Manu said, adding that investors must bring more than just capital to help startups scale efficiently and make significant returns in the long term.
Build businesses first, not user base
Vivek Khare, an angel investor and a strategic advisor at LetsVenture, noted that fundamentals are key to building sustainable businesses. One of his greatest learnings is that an entrepreneur must be focussed on building business from day one and not user base. “It can’t be building a user base and then cross selling or building something fashionable that will never become a business,” he said.
Further, founders must have a balance of growth and unit economics and know the metrics for a decade-long journey instead of the next few months. He said that sticking to the fundamentals will help sail through uncertain times and challenges, and that it is crucial for investors to spend time with founders to understand their values and fundamentals.
Seek validation from the customer, not investors
The panelists unanimously agreed that it makes business sense to spend time and energy in winning over the customers than investors.
"The more you seek investor validation, the less validation you get. The more you go and build what you believe, the more people will come to you. I think you have to have your personal belief in whatever you are trying to do," Shanti said.
Vivek further said that everything else is secondary if the customers love you, but without customer satisfaction at the center of discussion, any amount of ecosystem validation means nothing.
Do not name drop investors
Shanti believes entrepreneurs should never name drop other investors when seeking to raise capital. "No one investor knows everything that is happening. It is a complete non-starter in the conversation and I've seen a lot of founders do that, especially during the bubble time,” she advised the entrepreneurs in the room.
Lenskart Founder Peyush Bansal added that investors seldom fully understand what the entrepreneurs are doing.
“Entrepreneurs eventually need to learn to tell their stories better. You will find people who will understand your business. Don't try to change the story to raise money. Keep your story intact,” he said.
Do not be hung up on valuation
Shanti suggests early-stage startups do not always stay hung up on valuations and lose impactful investors along the way, especially if they are good and can contribute to the business – because over time, when you build a large company, that initial valuation does not matter.
In fact, Vivek said the biggest put-off with any entrepreneur is when valuation becomes the conversation starter and is all they care about. An investor would rather hear the ways in which a startup is solving specific problems.
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