– By Mona Singh

India has been witnessing a significant contraction in the startup funding scenario. In the first six months of 2023, startups raised a mere $5.46 Bn, recording a substantial 68% decline from $17.1 Bn in 2022 to $13.4 Bn in H1 2021. The drought is permeating startups across different sectors and stages, inhibiting the growth and scalability of their operations.

Securing funding is often a critical challenge and, at the same time, crucial for startups’ growth. Startups heavily rely on external investments to invest in a highly skilled team and develop revolutionary products. However, the ongoing funding crunch has led the startup ecosystem to boost the development of bootstrapped startups instead of relying on external capital sources. Thus, the need to adopt strategic approaches capable of thriving in a fiercely competitive ecosystem surges.

Considering financial basics

For investors, the funding winter identified the emerging winners in the startup ecosystem. In the present era, investors are more focused on unit economics of startups and leverage lucrative deals while gauging the scalability and sustainability of their business model. 

On the contrary, the funding winter for startups brings forth several approaches to combat financial crunches and improve their startup’s unit economics. At this point in time, the founders need to return to the basics rather than rush onto the activities that might slow down their growth. Against this backdrop, having a strong business model can help a startup stay ahead of the curve and provide investors a clear roadmap for growth and success.  

Focus on milestones

Milestones are tracking marks for startup founders and their investors. With overwhelming achievements, founders can portray their startups as moving on an upward trajectory. Having said that, harsh funding winter requires a strategic approach for founders to plan their businesses thoroughly and take them to the next level.

As part of the ideation and initial launch, startups must be thorough with their first prototype before implementing it on a big scale. This gives a reality check to founders and investors about the potential of the product. Further, founders can track their performance by building a Minimum Viable Product (MVP) to further the completion of their prototype. This will help founders to get customer feedback on the potential of the product which will further initiate the market validation process for them. 

Such milestones can help startup founders validate business ideas as great evidence of product market fit that lures the investors, based on key performance metrics. Consequently, this leads to building proven business models that further determine a clear plan for scaling and contemplating a neatly defined exit strategy. 

Diversification of sources

The startup funding ecosystem in India has evolved beyond venture capitalists in recent years. For startups to navigate the funding maze, diversification of funding sources is critical. It is vital for every startup, as it allows them to spread their resources rather than putting all eggs in one basket.

Exploring alternative sources of funding including – angel investors, also individual investors with strong financial connections, who have been through business processes and understand the critical pain points and opportunities. Several angel networks and platforms, operating as a group of investors are also coming into the landscape to provide larger funds and hedge risks. 

Another source of funding emerging in the startup ecosystem is family offices. Historically, India has a strong track record in generating businesses and passing on wealth to the next generation. Family offices are more patient than individuals or any other investor and give the right resources and monetary support to startups. 

Additionally, the launch of the Startup India program in 2016 also showed the government’s effort to push India’s startup ecosystem towards growth. The government also disbursed funds as loans through the Small Industries Development Bank of India (SIDBI) Fund of Funds Scheme. Last year, the government also launched the Startup India Seed Fund Scheme to provide funding support to startups. 

Besides this, accelerators and incubators and Micro VCs are also emerging as strong funding sources that not only provide funds but also access to expert networks. This expands the reach of the founders and helps them tap opportunities unrestricted by geographical barriers. 

Innovation and collaboration

Even during the funding winter, the startup ecosystem of India is thriving. There is a wave of innovative technologies and Generative AI is having a moment. It is emerging as a robust tool for startups to disrupt traditional business models and come up with more solutions that ultimately open more avenues for growth. Startups are leveraging Generative AI tools to drive business efficiency and create new market opportunities during financial crunch. 

Further, the idea of garnering more strategic alliances and partnerships also scales up the financial prosperity of startups, bringing financial breakthroughs. Entering into collaborations can offer startups the idea to collaborate with other entities and access new markets, customers, resources and technologies. Eventually, it reduces risks and costs while also creating synergies to combine strengths and complement weaknesses. 

Road Ahead

The Indian startup ecosystem is poised to navigate through the funding crisis far more easily than the previous year. Startup founders can now gear up for intense investment cycles ahead by eliminating hindrances that could lead to VCs taking their foot down and being picky about their investment decisions. In the coming months, resilient startups focused on the path to profitability can make their business investors’ next destination.

(Mona Singh is the Co-Founder of India Accelerator.)

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