Shadow trembling over startups for the cost of capital

In banking, by an old joke, work goes through a 3-6-3 routine: borrow 3%, lend 6%, and play golf at 3 p.m. In a globalized scenario, thanks to the easy money flowing into a political adventure of pandemic proportions, some rates have been dumped into negative territory. Lazy banking doesn’t need to translate into lazy investing, but the drift is evident in this cartoon of the last unicorn hunt: Get financing today, burn your inventory tomorrow to buy a client base and withdraw the next. The reality is more complicated, of course, but among online startups, “money to order” is almost true to some extent. By 2021, venture capital deals in India were in full bloom. Its value jumped from a quarterly average of about $3.1 billion during 2019 and 2020 to $5.6 billion in the first quarter of 2021, according to PwC data, and then topped $10 billion for an operation that began last July and lasted three quarters. It was too good to last. As rising inflation forced the start of the US Federal Reserve’s monetary reversal, venture capital funding fell by 40% in the three months ending June 2022. While early-stage fintech funding has stalled, and India-focused funds may have ballooned this year, How long the total stress will last is anyone’s guess. It’s clear that our startup challenges have grown more intense.

Free credit at the top of the system served as an incentive. A huge dose of easy money for lenders—some of it cheaper than free—facilitated more lending, debt returns (and recycling), investments, other spending, and more, by injecting fuel that’s seen as inconsequential as an economic boost. For major equity investors, it has brought the break-even point of return to new lows. However, as with any extended capital glut, the search for returns globally among those pouring money would certainly drive riskier bets. Some of these bets may have an expiration date set by the Fed’s policy switch, which explains today’s concern about a major defeat ahead as interest rates rise. Not all VC players will feel the same heat. Large investors tend to act as a way to spread risk, with portfolio diversification to ensure that a few successful projects can make up for the accumulation of losers. Many of the online plays have been in winner-takes-all markets, where success requires scaling business or death; For the data collected to reach critical mass and form a competitive advantage, it had to be done quickly, so the huge money spent on customer pounces made strategic sense. But such grand plans now have to contend with the more expensive phase of capital.

With the math being reconstructed, startup valuations have been shaken, public issues deferred and the adoption of austerity. Unicorn case or otherwise, business plans that do not resist price hikes and stagnation will unfold as the wave of liquidity turns. It was only expected that cost inflation would be brought under control, but there might also be room for strategy changes in some cases. In areas like financial technology, in particular, value creation models need not be driven by scale. Digital finance, for example, could use the open power of blockchain ledgers to exploit the inefficiency of an old brick-and-mortar sector, ready-made, and potentially also profitable from the word go; Our central bank will have to balance its good innovation with financial stability, as the bank’s governor noted in his comments Friday on fintech. But even in other areas of startup companies, profit paths can depend on the value of the idea in itself. A business with a sales letter that is uniquely attractive enough to keep it viable at any size will not only grow steadily, but it will always be worth project funding. Whatever the scale of play, the lure of a “better mousetrap” remains as relevant as ever. Meeting needs remains the basic game.

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