- Cockroaches are startups that can survive a long period of
winter financinglike the parasites that can survive a nuclear war.
- Most startups go through the cockroach phase at least once, gaining experience and knowledge along with their business strategy, experts say.
- For startups that cannot survive without external funds, the future is bleak, leading to mergers, acquisitions and, in the worst cases, even closures, experts say.
India’s startup ecosystem has matured, but it’s also getting chills with the onset of the funding winter. Under these circumstances, venture capitalists (VCs) have shifted their focus from unicorns – companies valued at $1 billion, to cockroaches – companies that can survive the test of time. The name refers to the fact that cockroaches are known to survive even nuclear war.
Anirudh A Damani, CEO of Artha Group, defines a cockroach as a startup that does not require external support to survive. “It can run indefinitely on the money it generates selling its products or services for a profit – something a loss-making startup can’t afford since its biggest customer is the venture capitalist,” says -he.
The struggle for funds is not an unfamiliar challenge for most startups starting from the pre-seed level. However, this time around, a long winter of funding has set in and is expected to last between 6 and 18 months according to many experts. And funding began to dry up six months ago – falling to $2.7 billion in the quarter ending September 2022, from a peak of $15.9 billion in the year-ago quarter, according to a report by Venture Pulse.
A good startup can persist despite these changing dynamics, experts say. “Startups that follow the cockroach approach persist despite changing market conditions, environments, and investment scenarios. Most startups go through the cockroach phase at least once, gaining experience and knowledge as well as their business strategy despite changing market conditions,” said Mitesh Shah, Partner at Physis Capital.
To ensure a startup turns into a cockroach, companies will need to make tough changes to their models – founders will need to focus on valuations and cash flow.
“These unicorns sitting on money still survive, but the ones that are at the end of their trail are struggling. However, the good thing is that because of these times, companies have started to focus on business in terms of unit economics and on the road to profitability rather than just looking at fundraising and vanity valuations,” said Bhaskar Majumdar, Managing Partner, Unicorn India Ventures.
The sustainable economy of unity is the key
For the venture capital ecosystem, which has had hits and misses in good measure, the funding winter will be a litmus test. “In these winter times, businesses that solve a fundamental human problem thrive at the expense of businesses that buy revenue under the guise of deep discounts leading to an unsustainable unitary economy,” Damani says.
For startups that cannot survive without external funds, the future is bleak, leading to mergers, acquisitions and, in the worst case scenario, even closures.
“In the current environment, where funding metrics have tightened and valuations are under pressure, startups (their founders and investors) are looking for alternative survival strategies. Some startups that are heavily dependent on funding for their survival and growth often tend to do a distress sale or close the ship,” Majumdar said.
Sectors like edtech, which have raised a lot of funds during the pandemic, are also struggling due to overestimates of TAM or total addressable market. Consumer-facing industries that show a “need” to spend money to acquire customers could also reduce a startup’s ability to turn into a cockroach.
“As their marketing spend is essential for customer onboarding and a significant contributor to burn, unless they are able to pivot to models that can support existing business operations without discretionary marketing spend, it is highly likely that these companies are the most struggling,” Ankur said. Bansal, co-founder and director of BlackSoil.
The most struggling startups in the development phase
Cockroaches that intend to survive will also have to lower their valuation expectations, experts say. This is especially true for later-stage startups, which will require more funds and will also need to demonstrate a path to generate cash.
Late-stage startups will have the hardest time securing additional investment, Shah says, as valuations reset and the focus shifts back to profitability. Valuation expectations also need to be tempered, in line with changing market dynamics.
“Good companies will certainly have access to capital, but they need to be more accepting of valuation multiples. A multiple correction is necessary for efficient markets from time to time. But yes, many companies have and should be open to the strategic outcomes of their larger counterparts or established companies,” said Apoorva Sharma, Partner at Stride Ventures.
How to turn into a cockroach?
Sharma believes Indian startup founders will channel their strong survival instincts. “They’re cutting costs to make sure they have longer leads. Some companies have actually demonstrated improved unit economics,” she told Business Insider India.
According to Shah, many of those who might fail the test are those with a utopian vision of growing beyond their abilities. Cockroaches must have strong fundamentals like product demand, short product development cycle, and controlled capital expenditure.
“A key component of a successful cockroach startup is to focus on a specific niche or target market, at least early in its journey. A focused, long-term business concept and a captive market are needed to become a successful cockroach startup. A value-based proposition is crucial if an organization wants to reach its target customers. A business needs a distinctive selling proposition in the business to entice investors to dip into their pockets,” says Shah.
Bansal believes it’s essential to focus on fundamentals and cash flow – cockroaches are those startups that can stray away from the concept of growth at all costs and focus on capital efficiency. Most VCs also say that it’s the founders who will have to go through the mindset shift with the startup.
Majumdar lists the traits of a good cockroach that can thrive when funding is slow – “Founders survival instinct, ability to turn the business into a clear profitable path, inherently low-key and not for the purpose of creating a profile for the pleasure of doing it.”
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