- Cockroaches are startups that can survive a long period of
winter financing like pests that can survive a nuclear war. - Most startups go through the roach phase at least once, gaining experience and knowledge as well as devising strategies for their business, experts say.
- For those startups that can’t survive without outside funding, the future is bleak, leading to mergers, acquisitions and, in the worst-case scenario, even closures, experts say.
India’s startup ecosystem has been maturing, but it’s also getting chills with the onset of funding winter. Under these circumstances, venture capitalists (VCs) have shifted their focus from unicorns, billion-dollar companies, to cockroaches, companies that can survive the test of time. The name is a reference to the fact that cockroaches have been known to survive even nuclear war.
Anirudh A Damani, CEO of Artha Group, defines a cockroach as a startup that does not require external support to survive. “You can run forever on the cash you generate from selling your products or services at a profit, something a loss-making start-up can’t afford to do, since their main client is the venture capitalist,” he says. the.
The struggle for funding is not an unknown challenge for most startups starting from the pre-seed level. However, this time a long funding winter has started and is expected to last between 6 and 18 months according to many experts. And funding began to dry up six months ago, falling to $2.7 billion in the quarter ending September 2022 from a high of $15.9 billion in the year-ago quarter, according to a Venture Pulse report. .
A good startup can persist through these changing dynamics, experts say. “New companies that follow the cockroach approach persist despite changing market conditions, environments, and investment scenarios. Most startups go through the roach phase at least once, gaining experience and knowledge as well as crafting business strategies despite changing market conditions,” said Mitesh Shah, Partner at Physis Capital.
To ensure that a startup becomes a roach, companies will need to make drastic changes to their models: Founders will need to shift their focus from valuations to cash flows.
“Those cash-sitting unicorns always survive, but those at the end of their catwalk fight. However, the good thing is that because of these times, companies have started to focus on business in terms of unit economics and the path to profitability rather than just looking at fundraising and vanity valuations,” Bhaskar said. Majumdar, Managing Partner of Unicorn India Ventures. .
Sustainable unit economy is key
For the venture capital ecosystem, which has seen much of its hits and misses, the funding winter will be a real test. “In these winter periods, companies that solve a fundamental human problem thrive at the expense of companies that buy revenue under the guise of deep discounts that lead to unsustainable economic drives,” Damani says.
For those startups that cannot survive without outside funding, the future is bleak, leading to mergers, acquisitions, and in the worst case, even closures.
“In today’s environment, where funding parameters have become tighter and valuations are under pressure, startups (their founders and investors) are looking for alternative survival strategies. Some startups that are heavily dependent on financing for survival and growth often tend to make rush sales or wind the ship,” Majumdar said.
Sectors like edtech, which have raised a lot of funds during the pandemic, are also in trouble due to overestimates of TAM or total addressable market. Those consumer-facing sectors that show a ‘need’ to spend money to acquire customers could also reduce a startup’s ability to become a roach.
“Since their marketing spend is key to customer onboarding and a major contributor to burn, unless they can pivot to models that can sustain existing business operations without discretionary marketing spend, these companies are likely to have more problems,” Ankur said. Bansal, co-founder and director of BlackSoil.
Late-stage startups in most trouble
Cockroaches hoping to survive will also have to lower their valuation expectations, experts say. This is especially true with late-stage startups, which will require more funding and will also need to demonstrate a path to generating cash.
According to Shah, late-stage startups will face the most trouble getting additional investment as valuations reset and there is a renewed emphasis on profitability. There should also be moderation in valuation expectations, in line with changing market dynamics.
“Good companies will definitely get access to capital, but they have to be more forgiving of valuation multiples. Some correction in multiples is needed for markets to be efficient, from time to time. But yes, many companies have and should be open to strategic outcomes from larger peers or established corporations,” said Apoorva Sharma, partner at Stride Ventures.
How to become a cockroach?
Sharma believes that Indian startup founders will channel their strong survival instincts. “They are pruning costs to ensure they have longer tracks. Some companies have shown improved unit economics,” he told Business Insider India.
According to Shah, many of those who could fail the test are those with a utopian vision of scaling beyond their capacity. Roaches must have strong fundamentals such as product demand, a short product development cycle, and controlled capital expenditures.
“A key component of a successful roach startup is to focus on a specific niche or target market, at least early in your journey. A specific long-term business concept and a captive market are necessary to become a successful cockroach company. A value-based proposition is crucial if an organization wants to reach its target customers. A company needs a distinctive selling proposition in the business for investors to reach their pockets,” says Shah.
Bansal believes that a strong focus on fundamentals and cash flows is essential – the roaches are those startups that can shy away from the concept of growth at all costs and focus on capital efficiency. Most VCs also say that it is the founders who will have to go through the mindset shift along with the startup.
Majumdar lists the traits of a good roach that can thrive when funding is sluggish: “Founders’ survival instinct, ability to transform the business into a clear and profitable path, inherently low-key and not in the business of building a profile for the sake of it.” good of him.” .”
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