How to Sustain Startup in Funding Winter? | 7 Strategies to Help Startups Survive the Funding Winter Chill

The pandemic was surprisingly a good time for startups in India, with investments in startups skyrocketing. India produced many unicorns during this time, surprising the first-world nations. Lately, studies indicate that with the funding winter in India, private equity and venture capital investments declined 27% in April 2022 as compared to April 2021. Soaring inflation, interest rate hikes, tightening liquidity, conservative venture capital investments, and rough capital markets are the primary reasons why the flow of investments into startups has reduced over time.

Another study shows that overall funding in Indian startups has declined by over 40% to $6.8 billion in the second quarter of 2022. The impending funding winter can be a tough time for startups to survive. It will require extremely calculated steps that have to be laid out and executed properly to get through this tough space. This article will look at some of the ways in which entrepreneurs can negotiate through this rough patch in a more nuanced manner.

What is Funding Winter?
Strategies to Help Startups Survive the Funding Winter

• Be on the Look for Different Funding Options
• Improving Customer Experience
• Maintaining Strategic Partnerships
• Halting Experiments
• Thrive on Leaner Budgets
• Altering Business Strategy
• Maintaining Transparency

What is Funding Winter?

Funding Winter is a situation wherein startups are faced with a lack of funding, which obstructs their growth in such a way that sometimes they will have to completely shut down or sell themselves to bigger establishments. It generally occurs in times of economic slowdown, when the general funding opportunities dry up. It is also seen to be followed by a stretch of tremendous funding opportunities like what was seen during the pandemic.

As per a report by Traxcn, India is currently under the spell of funding winter across tech startups and it is likely to continue for the next 12-18 months.

Strategies to Help Startups Survive the Funding Winter

The rough patch of funding winter is only a temporary affair. However, the duration and impact of this time can never be predicted beforehand. However, there are certain strategies that entrepreneurs can adapt to sustain through the funding crunch.

Be on the Look for Different Funding Options

While funding winter is a time of overall financial crunch, startups can always look for alternate funding options, especially debt-backed funding. While it is an excellent idea, entrepreneurs need to take care to maintain a healthy ratio of debt to equity. Companies like SMOOR survived the pandemic in a profitable manner through debt-backed funding.

Today, the providers of this mode of funding have come up with different kinds of plans suitable for entrepreneurs to scale up their businesses. There are various other options like Supply Chain Financing/Invoice Discounting, Working Capital Financing, Asset Financing, Revenue-Based Financing etc. To prevent the risk of exhausting equity, it is always better to combine flexible debt and revenue to fund the company in times of financial difficulty.

From Pre-seed to Late Stage Funding - Sources of Every Funding Stage

As the business grows, it requires funding for expansions and research. There are different stages of funding that respond to the different needs of a growing business.

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Improving Customer Experience

The age-old saying that the customer is king never goes out of trend even during a funding winter. In fact, it holds the most value during this time of all the others. Startups can work on increasing the reach of their products amongst customers during this time. A good product and a good customer service system can go a long way. Giving out coupons without undermining the overall health of the startup can help retain efficient customer engagement. Further services like customer support can be revived to ensure a better reputation.

Maintaining Strategic Partnerships

There is no doubt in the fact that funding winter is a time to stay low. However, it is not the time to hibernate as well. Instead of wasting money by focusing on big clients, startups can try to leverage partnerships with those clients that can convert customers at a high rate of intent. These partnerships serve as channels to monetise consumers. Going for smaller partnerships also has the additional benefit of lower customer acquisition costs.

Halting Experiments

It is true that an important aspect of the growth of any startup is the innovative ideas and practices that it brings to the table. However, during the funding winter, it is best to not experiment with anything new. It is the time to focus on the core business and halt any kind of activity that the company is not sure about. In this way, startups can prevent unnecessary expenses and use the available funds to strengthen and sustain the basics.

Thrive on Leaner Budgets

Cost-cutting is one of the most common methods used by startups during funding winter. In some cases, layoffs might be an inevitable choice. Experienced professionals opine that it is better to do one big layoff than to do multiple small layoffs, as it can be financially and psychologically unhealthy for the startup and the employees, respectively. It is also the time when startups can offer shares of the company rather than fat pay cheques to the employees. There has to be a calculated control over increments, appraisals, and allowances. At the same time, startups need to closely watch the expenses of the firm in real-time.

Altering Business Strategy

Funding winter is the time when startups cannot afford to make the wrong decisions. During this time, situations may demand a change in business strategy to ensure that the best possible decisions are taken. Startups have to focus on data-driven decisions to prevent unnecessary expenses. Altering business strategy will also include reworking the networks for cash flow based on the situation.

Maintaining Transparency

While the overall economic distress that prevails during the funding winter is not a good place to be, hiding this fact can be fatal. Firstly, people, including the employees, will understand that the startup is under pressure even before it is officially announced. So as to maintain a better customer impression and employee loyalty, it is always good to keep accounts and details of the startup transparent. At the same time, it is necessary to keep the investors informed about the financial status of the company as well. All these will additionally help in gaining financial help from hitherto unexplored channels or people.

10 Most Common Misconceptions About Startup Funding

There are many common misconceptions about getting funding like depending on an existing network, underestimating the timeline of funding, being in stealth mode, etc.

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Conclusion

Funding winter is indeed a rough test to pass. While it is only temporary, its effects can be fatal. It is always important to expect the worst and prepare for the best. Today, several funds and grants from the government are earmarked to be used in situations like these. Staying aware of the political and economic situations in and around the country and in the concerned domain is also an important exercise to be constantly taken care of. As scary as it may sound, funding winter is not an impossible river to cross. With prudential flexibility, clear-cut plans, and proper implementation, startups can sustain the funding winter.

FAQs

What is funding winter?

Funding Winter is a situation wherein startups are faced with a lack of funding, which obstructs their growth in such a way that sometimes they will have to completely shut down or sell themselves to bigger establishments.

How to sustain startups in funding winter?

The following are the prominent strategies to follow for sustaining startups in funding winter:

• Be on the Look for Different Funding Options
• Improving Customer Experience
• Maintaining Strategic Partnerships
• Halting Experiments
• Altering Business Strategy
• Thrive on Leaner Budgets
• Maintaining Transparency

How long the funding winter will last in India?

As per a report by Traxcn, India is currently under the spell of funding winter across tech startups and it is likely to continue for the next 12-18 months. It was in Q3 of 2021 when funding for tech startups saw a peak in India. However, since then, funding has been on a decline, as per the report.