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Unicorns are passe. Cockroach is the buzzword as funding winter chills startup sector

Ongoing funding winter sparked by a host of factors, including Russia-Ukraine war, fear of a global recession, and dismal performance of the IPOs of some Indian companies.

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New Delhi: A chill is setting into the Indian startup ecosystem, and it’s seeing venture capitalists shift their focus from unicorns to something they see as more resilient, the ‘cockroaches’.

The startup lexicon describes unicorns as companies valued at over $1 billion. Cockroaches, meanwhile, are their more hardy counterparts — companies that investors say are capable of surviving a tough business climate with their more “steady approach” to growth.

Such companies have especially caught the attention of investors amid the onset of a ‘funding winter’ over the past few months.    

A ‘funding winter’ is a situation when the market is correcting its cash flows, and companies find it difficult to raise funding and achieve sky-high valuations. 

The phenomenon has been sparked by a host of factors, including the Russia-Ukraine war, fear of a global recession, and dismal performance of the IPOs (Initial Public Offering) of some Indian companies.

According to a PwC report, funding for Indian startups in 2022 was nearly $24 billion, a drop of 33 per cent in comparison to 2021, when $37.2 billion was invested.

Experts feel that startups now have to brace themselves to face a funding winter for at least another year. And cockroaches offer a safe bet as the sector faces its biggest crisis so far.

If 2021 was the year of the unicorns, experts say 2023 could well be the time for cockroaches.

After all, the creatures are counted as among the Earth’s most resilient.  

Also Read: Where do India’s angel investors come from? No, most of them aren’t IIT, IIM grads

Survival of the steadiest 

Describing cockroaches, Ankur Bansal, co-founder and director of BlackSoil, a debt fund company, said these are “startups that are growing in a more measured way and are closer to profitability”.

He added that while the term is not a new one, it is being used in terms of startups more now because of the funding winter and the ability of some startups to survive that. 

He said 2023 is the year of cockroaches because, in 2021, many startups were overfunded and “ended up burning a lot of cash, which has now put them in trouble”. Those that were smart with their business plans will manage to survive the funding winter, he added. 

These are startups that are being careful about their growth and know what to spend their money on. “They know that they do not have to spend money on new experiments and new offices,” said Bansal. 

His team, Bansal added, is now focusing on funding such startups that can survive. 

Anup Jain, managing partner at Orios Venture Partners, said, While early stage investments are on an upward trajectory, the overall funding in Indian startups has seen a slowdown in comparison to 2021 which was an unnatural year.

“This has had a trickle-down effect and there is a greater focus on extending runways and conserving cash for a longer fundraising cycle. This can only happen if growth is sacrificed and hence the term ‘cockroach’.”

For startups to minimise their expenses, he said, “Instead of spending with speed to increase consumer acquisition, it will make tremendous sense to go for PMF (product market fit, or a product’s ability to satisfy the customer) amongst the initial set of customers and then gradually increase acquisition.

“Usually marketing and hiring is the single biggest cost and this is where startups need to be most cautious.” 

Unicorns vs cockroaches 

In 2021, 44 new startups reached unicorn status, and India saw 100 unicorns for the first time.

However, the trajectory has been downhill since then and, in 2022, only 20 new additions happened in the list. The number of active unicorns in India reached 84 from 105 in September last year. While some of them lost their valuation, a few others lost their status due to IPOs. 

Experts say the funding winter is here to stay at least for the next one year and hence cockroaches are the ones investors are looking for. 

Sushma Dua, an individual investor, said, “Similar to the characteristics of a cockroach, which are adaptable and can survive in all conditions, these startups with their strong product and steady approach towards their business can survive the toughest situations in business.” 

She added, “Unicorns often fail because they are mythical creatures, but cockroaches are the reality.”  

Talking about the sectors that will see more such startups, Jain said all sectors will see this approach unless the tailwinds on consumer adoption are very strong, for example — climate and upskilling edtech. 

Agreeing with Jain, Bansal said every business that has technology involved in it will see cockroaches. “Every business which has tech involved in it will be affected, but the SAAS (software as a service) industry is the first one that comes to mind when you talk about this,” he said. 

‘Funding winter won’t last forever’

According to a blog on Razorpay, “Funding winter refers to a period of market correction in capital inflow which lowers the probability of startups getting higher valuations in the short to mid term. Simply put, founders find it difficult to raise funding and achieve sky-high valuations.” 

Market experts say the factors contributing to the Indian funding winter are the geopolitical tensions due to the Russia-Ukraine war, the sanctions imposed by the US on Russia, global inflation, and the value of rupee falling to historic lows against the US dollar.

Domestic factors contributing to the funding winter include the dismal performance of some of the recently-launched IPOs — e-commerce firm Nykaa, and PayTM, a fintech company. “Investors are increasingly looking at stock market performance before investing in a company,” said Dua. 

She said that startups will have to face a prolonged funding winter because of all these reasons. 

The funding winter, Bansal added, is here to stay for some time. “It will not last forever but it will stay for some more time. It’s difficult to give an exact timeline of when things will improve, but things will not last forever.” 

(Edited by Geethalakshmi Ramanathan)

Also Read: Why India’s Unicorn population hit a peak & dropped off in 2022



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