Investing in Start-ups: A Path to Success Amidst Uncertainty

Time is of the essence in the world of business, and nowhere is this more evident than in the realm of startups. The journey from conception to expansion requires not only a brilliant idea but also a substantial amount of capital.

Not every entrepreneur has the luxury of personal savings to finance their venture, which is where the art of raising funds comes into play. Over the years, investing in startups has witnessed a remarkable surge, thanks to the emergence of venture capitalists who have simplified the process.

In recent years, the startup ecosystem has experienced a significant shift. In 2022, equity capital investments in startups amounted to a staggering $24 billion, marking a decline from the previous year's record of $42 billion.

The global economy faced numerous challenges, including rising inflation, increasing cost of capital, and a decline in the valuations of public tech companies. As geopolitical tensions created an air of uncertainty, investors naturally adopted a cautious approach, resulting in a subdued investment landscape.

The repercussions of these developments were felt across the Indian startup landscape. Massive layoffs and dwindling funding due to the global stock market crash and subsequent liquidity crisis gave birth to what was referred to as the "funding winter."

Growth-stage financing suffered a downturn, but on the bright side, there was a surge in angel investments, particularly in the retail sector. Investors shifted their focus from rapid growth to value-based investments, signalling a change in investment preferences.

While the road ahead may seem challenging, it is important to acknowledge the remarkable growth of the Indian start-up ecosystem. This industry has become a catalyst for global innovation, driving progress and transformation. In such a dynamic environment, young start-ups must discern the opportune moment to raise funds.

Sanjeev Bikhchandani, the founder of Info Edge, a prominent player in the sector, has been a vocal advocate for investing in young companies. His insights are grounded in the valuable lessons learned from Info Edge's own journey.

“It is difficult to predict (when the funding scenario will improve)... But, there is still enough entrepreneurial activity going on. It is a good time to invest in startups if you have an 8-10 year horizon. Because two of our best investments — Policybazaar and Zomato — happened just before the crisis in 2008 or during it”.

Bikchandani said during a post-earnings call.

Info Edge, known for its flagship job search portal Naukri, has faced its fair share of challenges amidst the slowdown in the IT sector. As Naukri contributes to nearly half of Info Edge's billings, the company finds itself navigating uncertain waters. However, with approximately Rs 3,400 crore in cash reserves, Info Edge has weathered previous storms.

Bikhchandani shed light on the significance of this robust financial position, stating that a portion of the cash reserves represents customer advances. Should customers demand refunds, the company would need to return around Rs 1,100 crore, leaving them with Rs 2,300 crore.

This substantial amount of cash reserves proved instrumental during the COVID-19 pandemic when Naukri billings plummeted by a staggering 144%. Bikhchandani highlighted how the company's financial stability enabled them to weather the storm without resorting to layoffs. Even during the 2008 global financial crisis, Info Edge's prudent financial management ensured the preservation of jobs.

In light of these experiences, Bikhchandani's call to invest in start-ups seems well-founded. With careful consideration of cost-efficiency and valuations, investors can identify promising ventures that have the potential to thrive even in the face of adversity.

As the start-up landscape continues to evolve, it is crucial to adapt and seize opportunities that arise during uncertain times. Investing in start-ups, when done judiciously, can prove to be a gateway to success. By providing the necessary capital and support, investors can fuel the growth and innovation that drive economies forward.

It is a delicate dance between risk and reward, but one that holds immense potential for both entrepreneurs and investors alike.

Also Read:

• Surat emerging as a thriving hub for SaaS startups in India