Funding Your Tech Startup - Views On Current Funding Scenario

Angel funding. Venture capital. Series A. Unicorn. Valuation. Exit. Stock options. Freebies. Awesome workplace. Office parties……..

All those terms sound cool to youngsters with dreamy eyes seeking hot jobs in startups. But few seem to realise in the euphoria that there is another side to the heady boom in entrepreneurship

Today, Indian startup funding scenario is at its unpredictable best. While 2014 and 2015 witnessed huge funding rounds, with the emergence of food-tech startups, hyperlocal and aggregators, in addition to e-commerce platforms, 2016 has had a mellowed beginning. Apart from the slowdown of funds inflow, we now hear more of startups merging or conglomerating.

image source:economictimes.indiatimes.com

Total funding for Indian venture capital-backed companies topped $12 billion (INR 80,000 crore) across more than 1,220 deals in the past two years, with $7.3 billion invested in over 880 deals in 2015 alone. While this momentum is expected to slow down, Series A funding — the first institutional capital a startup receives — is likely to continue to be robust.

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At its peak, we used to see 2-3 start-up pitches a week from one of the top consulting firms. Now it’s down to one a month from them,” -“Entrepreneurs also don’t come with set valuation expectation now, or with two term sheets in hand as it was earlier this year.” The size of Series A deals, which had ballooned to $10 million in early 2015, has now come back to $3-5 million. (source:retail.economictimes.com)

More failure stories and that is FINE

These days I come across stories in the media like ‘Lessons from my failed startup’ rather than ‘How a college dropout closed $1 billion funding round for his startup’. The number of startup failures has seen a sudden and steep upsurge and many are either closing down or curtailing their operations to make ends meet.

There is a marked slowdown in the Indian tech funding scene. The fund crunch is more visible at the early-stage levels. And the impact can be clearly felt. Several tech startups across sectors have folded up, or have merged with stronger rivals, as a wave of consolidation sweeps thrown the Indian startup ecosystem.

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Will 2016 see a massive correction in valuation even as more Internet startups go belly up? There are many other more mundane reasons that your startup might be deemed non-fundable, depending on your own circumstances, where you live, or the case you have put together.

Image source:economictimes.indiatimes.com

People having been reaching out to me asking for advice regarding a career change; everyone from accountants and real estate agents to retail employees have asked about joining a startup or starting a company of their own.

Almost every time I’ve told them to reconsider, that it’s probably not a good idea…. They see headline after headline about some of the most outrageous startup ideas being funded or acquired for millions and millions. It is true that jumping into a startup has many allures.

Startups do not employ a lot of people, so every person counts. As a member of a small, committed team, your contribution really makes a difference to the success or failure of the business. You can see your impact day in and day out.

Image source:economictimes.indiatimes.com

In almost all startups, there is no red tape to cut through to solve problems and implement new ideas. You will not have to battle or navigate a corporate bureaucracy. In startup-land, there just isn’t time for that kind of thing.

You will work in the trenches, right alongside the company founders. Often, early startup employees get exposure to the real movers and shakers in the industry. That is a powerful experience.

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Being an active serial entrepreneur and angel investor, here some tips to get real and friendly words of advice for startup employees – existing and aspiring.

1. Remember the risk involved: Startups are hot because they dream big but a lot of the rewards are linked to risks taken by everyone: venture capitalists, angel investors, entrepreneurs and employees. This could mean dealing with ups and downs that you don’t quite know about.
2. What’s good for the company may not be good for you: In the end, profitability is important for a startup. This means higher revenues and/or lower costs. This could translate as extra pressures on sales and customer service staff or a demand for fewer heads and hands to do more work.
3. Funding may dry up, suddenly and that happens: Venture capitalists woo in style, and then shoo in style. When they don’t see the milestones coming, they turn off the tap, and your CEO may be left holding the baby – if at all he/she is around to do so.
4. Goodies come with the slog: Long hours, nightly phone calls and drudgery are expected when they give you good café food and parties. Consider if you can juggle these with a healthy personal life.
5. Valuations may go down: It is a two-way street for your stock options. Bubbles may burst, or at least, company valuations may go down if sales and/or growth targets don’t come on as expected. They are trying to create mechanisms to sell illiquid shares of unlisted companies which are what startups is all about.
6. The Silicon Valley Dream is far away: It is a different country, India has labor laws to protect employees but the flip side is that this also means hassles for employers. Easy hire-and-fire makes your job less secure but higher government interventions mean company growth may not be cruising.
7. Mergers/acquisitions can hurt: Your Company may be acquired –or may acquire. Either way, for some employees, this may imply a redundancy. You may be the best vice-president, but your head may roll if the merger plan has someone in your league that is aster/better/cheaper/smarter/luckier.
8. Your skills stay; stay abreast: Companies come and go and startups can go bust for reasons no one can guess. But what you are good at may be more permanent. Keeping that skill in good shape is an investment that may matter more than a big dollop of venture funding that comes into a startup.

Wrapping up

Both entrepreneurs and investors will be keenly watching the battles for the market domination. While these battles have primarily been playing out based on discounting  and capital raising so far, differentiated offerings and technology are more likely to give players an edge in the year 2016. Funding becomes relatively tougher and questions are being raised on how these players will reach profitability.

Failing and accepting failures are very much a part of entrepreneurship, and this needs to be learnt and understood.

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