Funding winter to separate the wheat from the chaff
SoftBank chief executive officer, Masayoshi Son has a stark warning for startup founders. Son runs one of the biggest fund houses of the world, SoftBank that posted a record loss of $17 billion in its Vision Fund during the June quarter.
SoftBank chief executive officer, Masayoshi Son has a stark warning for startup founders. Son runs one of the biggest fund houses of the world, SoftBank that posted a record loss of $17 billion in its Vision Fund during the June quarter. Addressing the post-earnings briefing, Son said, "Our Vision Fund saw huge losses but unfortunately unicorn company leaders still believe in their valuation and they would not accept the fact that they may have to see their valuation (go) lower than they think. So, until the multiple of unlisted companies is lower than that of listed companies, we should wait."
Unicorns are those startups that are valued at $1 billion or more. Vision Fund is one of the biggest foreign fund houses with investments across companies including Paytm, Policybazaar, Delhivery, Cars24, Meesho, and Unacademy among others in India. Given the macroeconomic uncertainty, Son's statements carry a lot of relevance.
Firstly, he is hinting at prolong funding winter in the startup funding space. That has already been apparent in the funding drop of Son's Vision Fund. In the June quarter, the fund house invested only $600 million during this period as compared to over $20 billion in the same period last year. Secondly, the fund house implicitly admitted that there was a valuation bubble in startup ecosystem.
Many startups raised billions of dollars in astronomical valuations during the Covid pandemic period. Some of these startups hit the public market through IPO route. Since those listings, many of these new age startups have seen steep correction in their share prices, & hence valuations. Son hinted that the fund house would like to wait since the private valuation of startups match the public valuation.
The stance of SoftBank in terms of valuation and future investment indicates that a funding winter is on the horizon. The rate at which India used to add unicorns in the startup space has declined drastically. Funding declarations has also dried down. Some of the recent fund raises have happened at reduced valuations. Amid such environment, we can safely assume that there is no free money available in the market now. Startup founders have to brace for the impact. We have already seen startups laying off thousands of staffers in recent months. As funding winter looms large, cutting cost has come to the fore. And this is going to further accelerate in coming months. In a way, such events are required for sustainable development of Indian startup ecosystem. Building something is incredibly difficult but sustaining it after building is considered more difficult. No doubt, Indian entrepreneurs have proved that they can build billion-dollar companies by solving critical problems.
But they now have to prove that these entities can outlast their founders and create generational wealth. To achieve this, cost and profitability have to be brought to the forefront of their business operations. The more their internal accruals take care of their funding needs that will be better for their existence. And current economic environment will separate the men from the boys in the startup space.