The days of easy money for Indian startups are long gone. Due to prior missteps, venture capitalists (VCs) are becoming more stringent in their demands and are making founders pay more. This change in the financing environment places a higher priority on financial discipline, profitability, and sound corporate governance.
VCs Rewrite the Rules
The era of swift deal-making has given way to thorough study in place of FOMO, or the fear of missing out. These days, before making an investment, venture capitalists thoroughly investigate and scrutinize data. A lot of emphasis is placed on transparency, board makeup, cash flow management, and moral corporate conduct during the fundraising process.
Founders Feel the Squeeze
Not every creator is comfortable with this new reality. Breakdowns in negotiations are becoming more common; in the year ending March 2024, one in ten deals collapsed, up from one in sixteen the year before. In line with the heightened monitoring, deal closing times have also exploded, rising from one to three months to more than six months.
Why the Shift?
Following multiple high-profile corporate governance crises that shook the Indian startup scene, this modification has been made. Organizations such as BharatPe, Byju’s, Zilingo, Trell, Gomechanic, Mojocare, and Groyyo encountered problems as a result of putting expansion ahead of sensible business procedures. VCs are now committed to avoiding comparable problems.
The new normal for Indian startup founders includes:
- Exit Clawbacks: VCs are proposing clauses that could significantly reduce a founder’s equity stake upon exiting the company due to misconduct. Imagine Ashneer Grover’s 9.5% stake in Bharatpe, currently valued at Rs 2,000 crore, shrinking to a mere Rs 95,000 under such a clause!
- Enhanced Due Diligence: VCs are taking their time to understand a company’s financial health, governance structure, and long-term viability before investing.
- Focus on Profitability: The era of endless runway extensions fueled by investor cash is over. VCs are now demanding a clear path to profitability before putting their money behind a startup.
Not All Doom and Gloom
Even though the more rigid atmosphere might appear intimidating, there are advantages to it as well. VCs are contributing to the development of more long-lasting firms that can prosper by placing a high priority on excellent governance and financial responsibility. A better developed and well-respected Indian startup ecosystem may result from this.
Be ready to show that you have a clear route to profitability, a strong focus on corporate governance, and sound financial management if you’re an Indian company entrepreneur looking for capital. In the current environment, getting venture capital investment will depend on creating a transparent and reliable business.
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