Consolidation of markets and funding slumps are suitable for industries.
The present market slump is now impacting nearly all industries. FPIs have withdrawn USD 11 billion in YTD 2022 during the past six months, markets have dropped by 12% (from 60K to 53K levels), and the rupee has appreciated by 7%. (from 74.5 groups to 79.5 levels). The previous three months have seen a virtual collapse of the IPO markets.
However, most recessions have demonstrated that some of the most resilient companies have emerged from times of low liquidity. Following is a summary of what we consider significant benefits from our professional experience working through multiple prior downturns.
Talent retention & recruiting is more straightforward
In our opinion, the capacity of high-quality organizations to retain and recruit stronger individuals is the most significant benefit of a downturn. One of the most heartbreaking aspects of the past 24 months has been the talent that some high-quality, better-managed companies have lost to inferior organizations, frequently for financial reasons alone. The past three months have restored the status quo, but we anticipate that talent will return to better-managed companies over the coming few months.
More time for the founder to concentrate on business operations
Since 2020, several founders have constantly focused on collecting money with little time left to establish a successful organization or company. The present slump is compelling many investors to return to their portfolios and allowing entrepreneurs ample room to spend time on operations.
There will be more capital available for better-managed enterprises now.
Thankfully, the FOMO of listing right away and the drive to complete several rounds has subsided. Since the “crowding out” effect will no longer exist, we think the next 12 to 24 months will be excellent for raising financing for superior enterprises. Said, companies with more robust unit economics and paths to profitability will find it simpler to raise money (unlike in 2020/2021, where they were being benchmarked against some hyper-growth company models). This is because financial investors’ filters are more severe.
Even though the decline in fundraising lasts 18 to 24 months, substantial amounts of money are raised even in the poorest years.
Interesting tendencies are visible in worldwide historical trendlines of capital raised by businesses during recessions. Series A investment fell by 40%, Series B by 42%, and Series C by 47% in the worst year of the 2008 financial crisis (i.e., 2009 vs. 2008). However, even in those worst years, approximately 60% of the capital market was still stacked up, and VCs continued to spend slowly. Additionally, the 2008 recession created seed funding as a new institutional class for the first time, and over time, it has grown into a mighty institutional class.
Data on Indian unicorns tend to indicate that a significant portion of these companies was founded and grown during times that were not ideal for the Indian economy or capital markets.
For the Indian economy, the period from FY 2016 to FY 2018 was undoubtedly one of the weakest development periods. After the demonetization episode, the GST implementation caused a time of excruciating anguish for corporate India. The BSE Sensex spent a significant amount of time rangebound between 28000 and 32000, the capital market was stagnant throughout this time, and GDP growth had noticeably slowed. To put it mildly, Demonetization and the introduction of the GST harmed market sentiment.
However, research on Indian Unicorns indicates that several fantastic enterprises were established and constructed during those early years (FY 2016-2018). Thirty-six unicorns—or 46%—of the 76 unicorns revealed in the previous two years (2020–2022) were established between FY 2016 and FY 2018! Mamaearth, Licious, Digit, Meesho, Moglix, and Ofbusiness are a few of these names.
Many of these 36 organizations needed 2-4 years to secure their initial round of funding, but their ability to persevere in a challenging business environment prepared them well for the future. These facts suggest that excellent business development is possible even in depressed markets.
edited and proofread by nikita sharma
