- Cockroaches are startups that can survive for a long time
Winter financingLike the pests that can survive a nuclear war.
- Experts say that most startups go through the cockroach stage at least once, gaining experience and knowledge as well as developing strategies for their business.
- For startups that can’t survive without outside funding, the future is bleak leading to mergers and acquisitions and even closure in the worst cases, experts say.
The Indian startup ecosystem has been maturing, but it, too, is experiencing chills with the onset of the funding winter. Under these circumstances, venture capitalists have shifted their focus from unicorns – companies valued at billions of dollars, to cockroaches – companies that can stand the test of time. The name refers to the fact that cockroaches are known to survive even in a nuclear war.
Anirudh Damani, CEO of Artha Group, defines a cockroach as a startup that does not require external support to survive. “It can go on forever on the cash it generates from selling its products or services at a profit — something a money-losing startup can’t do because its biggest customer is a venture capital investor,” he says.
The struggle for funds is not an unknown challenge for most startups starting at the pre-seed level. However, this time around is a long financing winter, and is expected to last anywhere between 6-18 months according to many experts. And funding began to wane six months ago — dropping to $2.7 billion in the quarter ended September 2022 from a peak of $15.9 billion in the year-ago quarter, according to a Venture Pulse report.
Experts say a good startup can survive through these changing dynamics. Cockroach startups persist despite changing market conditions, environments, and investment scenarios. “Most startups go through the cockroach stage at least once, gaining experience and knowledge as well as strategizing their business despite changing market conditions,” said Mitch Shah, Partner at Physis Capital.
To ensure that the startup turns into a cockroach, companies will have to make tough changes in their models — founders will need to shift the focus from valuations to cash flows.
“The rhinos that sit on the cash always survive but those at the end of their runway suffer. However, the good thing is that because of these times, companies are starting to focus on business in terms of unit economics and the path to profitability rather than just Looking at the fundraising and vanity ratings, though.”
Sustainable unit economics is key
For the venture capital ecosystem, which has seen success and failure quite well, winter funding will be an acid test. “In these winters, companies that solve a fundamental human problem thrive at the expense of companies that buy revenue under the guise of deep discounting that leads to unsustainable unit economies,” Damani says.
For startups that cannot survive without outside funding, the future is bleak leading to mergers and acquisitions and even closure in the worst cases.
“In the current environment, where funding standards are becoming more stringent and valuations are under pressure, startups (their founders and investors) are looking for alternative survival strategies. Some startups that rely heavily on funding to survive and grow often tend to narrowly sell or shut down,” Majumdar said. ships.
Sectors like education technology, which have raised a lot of money during the pandemic, are also experiencing problems due to an overestimation of the TAM, or Total Addressable Market. Those consumer-facing segments that show a “need” to spend money to acquire customers may also reduce a startup’s ability to turn into a cockroach.
“Because their marketing spend is central to customer training and a huge contributor to burnout, unless they are able to shift to models that can maintain existing business operations without discretionary marketing spending, it is very likely that such companies will be in the most trouble,” said Anchor. . Bansal, Co-Founder and Director of BlackSoil.
Late startups face the most problems
Experts say that cockroaches that intend to survive will also have to lower their evaluation expectations. This is especially true with late-stage startups, which will require more funds, and also need to show a cash generation path.
According to Shah, late-stage startups will have the most trouble getting additional investment, as valuations reset and there is a renewed focus on profitability. There should also be moderation in valuation expectations, in line with changing market dynamics.
Good companies will certainly have access to capital but will have to be more accepting of valuation multiples. Some correction in multiples is needed for efficient markets, once in a while. “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 that Indian startup founders will channel their strong survival instincts. “They are cutting costs to make sure they have longer runways. Some companies have actually shown improvement in unit economics,” she told Business Insider India.
According to Shah, many of those who would fail the test are those with an idealistic vision of expanding their capabilities. Roaches must have sound fundamentals such as product demand, a short product development cycle, and controlled capital expenditure.
“A key component of any successful startup is to focus on a specific niche or target market, at least early in its journey. A long-term target business concept and a captive market are essential to becoming a successful startup. A value-based proposition is critical if it is to The organization needs to reach its target customers. A company needs a distinctive selling proposition in the business to get investors to reach into their pockets,” says Shah.
Bansal believes a strong focus on fundamentals and cash flow is essential – the cockroaches are those startups that can move away from the concept of growth at any cost and focus on capital efficiency. Most venture capitalists also say that it is the founders who will have to change the way they think along with the startup.
Majumdar lists the traits of a good cockroach that can thrive when financing is slow – “the survival instinct of the founders, the ability to turn the business onto a clear profitable path, low key by nature and not into the profile building business for the sake of it.”