‘Startups Looking At Global Markets Could Feel Some Impact If Recession Hits’

After riding the big bull for close to two years, the funding in the startup world has dried up as investors now are simply not willing to make large investments until economic conditions stabilise. But the situation is predicted to get worse as the world prepares for a possible recession. The layoffs at big-tech companies are the biggest indicators of what’s to come. But then, this would mean even tougher times ahead for startups.

The latest Tracxn report suggests that startup funding has dropped by 80 per cent year-on-year (YoY) in Q3 2022. Further, this drop was observed quarter-on-quarter (QoQ) too. But that’s not all. The report also says that the average ticket size witnessed a dip across all funding stages, with the late stage seeing the biggest fall of over 70 per cent, from USD 142 million in Q3 2021 to USD 42 million in Q3 2022.

On the sidelines of Bengaluru Tech Summit 2022, BW Businessworld’s Rohit Chintapali caught up with Roopan Aulakh (Managing Director at Pi Ventures) to learn more about the current funding climate in startup world and the effects it would endure if a recession were to set in. Read on for the excerpts from the interview.

Edited Excerpts:

What kind of changes do you see happening in the startup ecosystem with the backdrop of current funding winter?

Given that Pi Ventures invests in deeptech startups – the ones that are solving large global fundamental problems using 10x differentiated technology, we do not see anticipate any impact as such. But for overall startup ecosystem, it depends. If you are looking at early stage, I do not anticipate too many changes. But in the current climate, startups need to focus on the fundamentals. It’s important to build a business which is solving a problem. If you're sticking to those fundamentals, there is money out there – available for such startups.

Little bit of problem would, of course, prevail in late-stage investments where there is valuation correction happening. If a startup has got a good valuation in the previous round, the traction may not be great right now and that might hit their valuation. Other thing is – if companies are unfortunately caught between these cycles and are running out of money, they will have a difficult time.

All the signs point to a recession making a landfall in 2023 and the US seems to be diligently preparing for it. What is your opinion on the recession coming to India?

Tough to predict, you know? We live in an interconnected world. In 2008, we didn't feel the heat. But that doesn't mean that it won’t affect us this time. We are being impacted by inflation. So, we could be facing a recession, if it happens. I don't think we are immune to it.

So, you are pretty certain that what's happening over there can make its way to India?

I'm saying it may happen. We have certain protection mechanisms in place, but I don't know whether we are totally immune to it. But if you talk about startups, a lot of startups today are building in India, for India. And then there are a lot of startups too that are building in India for the global market. Let's say if there is a recession in those markets, then it does impact these startups. So, I believe these startups looking at global markets could feel a little bit of an impact because of the recession. But these are short-term things, cycles happen.

Do you expect a lot of startups to pivot in the current climate to adapt?

It again, depends. For larger startups, it's rather difficult to pivot. But if you are a small company, you can pivot in different ways and look at different use cases or use the same solution for a different market. This kind of pivoting is possible. But the larger you become; more difficult it is to pivot.

Do you see startups in your portfolio pivoting? 

Not yet.

Would that be something you would recommend or advise?

If needed, yes. But right now, we haven't felt the need to. Thankfully, everything is fine so far. Every portfolio has some companies doing well and some not so well. If things change in the startup world, why not?

What kind of talks are you having with startups in your portfolio currently?

It’s important to be cautious, but not at the expense of growth. Growth is important but overspending can be avoided. For instance, you have to invest in certain marketing initiatives, which you can't do without. Another thing we advise is to be mindful of how many people they hire and look at the budgets, to make sure there is runway.

How do you see the startup ecosystem panning out over the next two years with the backdrop of recession and conservative investors? 

Next two years will separate serious founders from non-serious founders. We will see founders that are actually passionate about the problem that they are solving and building towards. Beyond this, there will be correction in terms of valuation and maybe round sizes too.

How about Pi Ventures? What is your plan for the coming times?

We are currently raising our second fund and we should be closing it in the first quarter of next year. We plan to do 20-25 investments. Whatever we had anticipated to do this year, we did it. We might make 10-15 more investments over the next couple of years.

Also Read: ‘No Indication Of Recession In India, Else Markets Would Have Reacted’