Existing investors lend a helping hand to later-stage startups in rough waters

In the roughly decade between the two rounds, existing investors continued to pump capital every few years, and no new names joined Uniqode’s capital table. The company raised $25 million in a Series A round led by San Francisco-based Telescope Partners in 2023, valuing it at $1. ₹1,155 crore, providing an exit to some of its earlier investors, including Blume Ventures.

Uniqode is not alone. Indian startups often turn to early stage investors to help them navigate the valley of death. Historically, this was limited to the early stages as startups had little to show in terms of revenue or profits to attract new investors.

But after the fundraising rush of 2021 and 2022, things have changed.

Big startups seek relief

As funding sources in the startup ecosystem begin to dry up towards the end of 2022, many startups are forced to use up capital from their last round of funding, which was more than 24 months ago.

Even as startups work to improve their unit economics and chase profitability until they reach their final valuation, many are on the verge of running out of bankrolls. Short cash flows have plagued startups as they struggle to attract interest from new investors willing to write checks.

“Even good companies that were highly valued in earlier rounds are unable to convince new investors to come to the capital table at that price. Or people are taking advantage of desperation and asking for the price to be slashed by 50%. Startups valued at $600 million are being offered term sheets for $30 million but are being valued at $300 million. That’s a big shift,” said Karthik Reddy, co-founder and managing partner at Bloom Ventures. mint.

With investors still cautious about valuations, even higher-valued, later-stage companies are trying to return to existing investors in the form of bridge funding rounds to stay afloat.

Bridge rounds are relatively short rounds, ideally not giving a startup more than two to three quarters of funding.

But for founders who don’t want to value their startups by today’s standards, longer time frames to close, combined with increased scrutiny and caution among investors about new investments, make bridge rounds their best option, investors said. mint.

Bridges in 2024 and 2023

This coincides with private equity and venture capital funding into Indian startups surging to its highest level in two years in June, fuelled by an increase in growth-stage deals. mint I reported it earlier.

In these situations, startups are usually willing to announce funding rounds as investors feel more confident in the company’s future prospects and want to buy more shares at a higher valuation.

“The current rounds of funding have been announced as upside bridge rounds, not flat valuation rounds that happen to save a company from bankruptcy. These are companies wanting to add capital in anticipation of a significantly larger round or an IPO (initial public offering),” said Anirudh Damani, managing partner at Alta Venture Fund.

However, many bridge rounds remain unannounced beyond 2022.

“We’ve seen a lot of quiet internal rounds over the last few years,” said Anurag Ramdasan, partner at 3one4 Capital. “Some founders in our portfolio have told us they don’t want to draw attention to themselves, and so in some cases they choose not to announce funding rounds.”

Ramdasan noted that startups often choose not to announce funding rounds when they need bailouts due to short cash flows or for small bridge funds because they have no incentive to publicly disclose these funds. Another reason for not disclosing bridge funds is when internal investors cut the valuation.

Investor’s Dilemma

However, this is rare. Many investors choose to raise capital through convertible notes without pricing the round at all, as a down round may affect their risk perception and confidence in the company for the next round. That’s why bridge rounds are becoming more common in companies that have recently underperformed.

“It’s only fair to do a down round when there’s general agreement that a company is performing badly or when the company is scaling back growth,” Ramdasan said.

Recently, startups have seen down rounds, such as Meesho’s funding in May, which was valued at $3.9 billion, 20% lower than the previous round; Udaan’s funding in December, which was valued at $2 billion, down from $3.2 billion; and PharmEasy’s funding in March this year, which was reported to have been valuated at $710 million, a massive slash of almost 90%.

Meanwhile, investors are focusing on stabilizing their portfolio companies, reducing the likelihood of new investments and also impacting the number of external funding rounds.

Therefore, startups looking for shorter timeframes are less likely to consider outside investors participating in a round, let alone leading one.

“As the lead, I also do due diligence on the company. Doing all that work for just 1% ownership (in a short-term bridge round) is not worth it. For me personally, it only makes sense if I am leading with double-digit ownership, but the company does not need that much capital,” Ramdasan said.

He noted that if a startup is on its way to better unit economics and profitability, outside investors may ask for additional ownership through secondary sales of shares, along with a shorter primary round.

But if the company is on its way to profitability, existing investors will have little incentive to sell, Ramdasan added. “The only companies where existing investors would want to sell secondaries right now are those that are underperforming or are really at the end of their financial cycle and desperately need to sell,” he added.