In tough times, focus creates dominance, dominance creates value
Sridhar Sankararaman of private equity firm Multiples and Nitin Chandalia of BCG say that focusing on core business and profitability will see startups through the funding winter.
Focus, dominance and value are the key areas startups need to work on to survive the ongoing funding slowdown, said Sridhar Sankararaman, Managing Director at , at TechSparks Mumbai.
In a chat with YourStory Founder and CEO Shradha Sharma on survival strategy for startups during tough times, Sankararaman, an investor in , and , said 2021 saw multiple startups begin new lines of business to grow into the higher valuation they commanded, taking away from their core business.
“Focus creates dominance, dominance creates value,” said Sankararaman, adding that doing the same thing well over a period of time creates value for startups.
Calling 2021 an aberration in terms of valuations on offer as well as the volume of deals, Nitin Chandalia, Managing Director and Partner at Boston Consulting Group (BCG), said it was early-stage dealmaking that has slowed down.
“Last year, deal volume increased by 20% and deployment was 2-times. Nearly 75% of these deals were less than $25 million in cheque size, where businesses are not fully established from a profitability perspective. These deals have come down,” Chandalia told Sharma at the event.
He added that while the first quarter of 2022 had seen 35% to 40% lower deal volume over last year, there were enough takers for business models solving genuine problems.
The metrics to evaluate companies and measuring success had also changed over the past few months.
“In the context of business-to-business SaaS (Software-as-a-Service) companies, the last 18-24 months (were) all about annual recurring revenues (ARR). Fast forward to now, it has moved to driving greater value—am I pricing it well, do I have the right salesforce effectiveness, do I have the right LTV/CAC,” added Chandalia.
The ratio of the lifetime value of a consumer to the customer acquisition cost helps arrive at the business driven from each customer.
The startup ecosystem’s growth-at-all-costs mindset has clearly taken a backseat with founders as well investors focused on growing at a steady pace.
“Nobody says that a company has to grow at 100% year-on-year. Some things became unnatural over the last 3-4 years,” said Sanakararaman.
With startups facing a funding winter, a crucial word of caution from the speakers was to avoid being focused on the short term to hurry up growth.
Edited by Feroze Jamal