Crossing the Death Valley: Startups turn to existing investors for lifelines

Private equity and venture capital funding for Indian startups shot up in June to its highest monthly level in the last two years. (Mint)
Private equity and venture capital funding for Indian startups shot up in June to its highest monthly level in the last two years. (Mint)


  • As the startup ecosystem’s funding well began drying up towards the end of 2022, many startups have had to stretch the funds from their last raise that happened over 24 months ago

In 2019, Uniqode raised its fifth round of funding at a valuation of about 105 crore. The cloud-based technology venture that converts standard websites into mobile-ready versions, started in 2009 as Mobstac. It had raised its first seed venture capital funding at a valuation of 7.7 crore, led by Accel and Mumbai Angels, with Blume Ventures joining in a secondary sale of shares later that year.

For about a decade between the two rounds, existing investors kept ploughing in capital every few years to keep the ball rolling, with no new names joining Uniqode’s cap table. It was only in 2023 that the company raised a $25 million Series A round, led by San Francisco-based Telescope Partners, at a valuation of 1,155 crore, giving an exit to some of its early investors, including Blume Ventures.

Uniqode is not alone. Startups in India often rely on their early investors to help them bridge the death valley—a period in the life of a startup in which it has begun operations but has not yet generated revenue. Historically, it had been limited to the early stages because startups would have very little to show for in terms of revenue and profits to attract new investors.

But that changed after the funding frenzy of 2021 and 2022.

Mammoth startups seek bailouts

As the startup ecosystem’s funding well began drying up towards the end of 2022, many startups have had to stretch the funds from their last raise that happened over 24 months ago.

Even as startups work on improving their unit economics, and chase profitability to grow into their last round valuation, the funds in the bank are now on the brink of exhaustion for many. A short runway haunts startups as they fail to gather enough interest from new investors to write a cheque.

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“Even good companies richly valued in the prior rounds are not able to convince new investors to come and join the cap table at either that price or people are taking advantage of the desperation and are demanding to undercut prices by 50%. A startup valued at $600 million would be offered a $30 million term sheet, but it will be at a valuation of $300 million. That’s the big shift," Karthik Reddy, co-founder and managing partner at Blume Ventures, told Mint.

With investors still cautious on valuations, even high-valued late-stage companies now find themselves returning to their existing investors, seeking to extend lifelines in the form of bridge funding rounds.

Bridge rounds are comparatively shorter rounds that do not ideally give more than two to three quarters of runway to startups.

However, for founders not wanting to get their startups valued at today’s metrics, in addition to longer deal closure timelines, with increased scrutiny and caution in taking newer bets among investors, bridge rounds have become the best bets for them, investors told Mint.

Bridges in 2024 and 2023

This comes at a time when private equity and venture capital funding for Indian startups shot up in June to its highest monthly level in the last two years, buoyed by increased growth-stage deals, Mint reported earlier.

To be sure, a majority of these deals are led by internal investors of the company, notable examples being the $665 million in quick-commerce firm Zepto, $120 million in beauty platform Purplle and $24 million in customer onboarding platform Rocketlane. In fact, four out of the top five funding rounds in 2024 were led by internal investors, according to data by Venture Intelligence.

In situations like these, with investors confident about the company’s prospects and wanting to increase their stake at a higher valuation, startups are typically open to announce the round.

“The rounds happening now, shooting funding up, are ones that are announced as they are upside bridge rounds, not the ones which happened to save the company from shutting down, at flat valuations. These are companies who want a funding topup because there is an expectation of a substantially bigger round or an IPO (initial public offering), coming in," said Anirudh Damani, managing partner, Artha Venture Fund.

Also read | Silver lining for Indian startups as monthly funding shoots highest since June

However, since 2022, many bridge rounds have remained unannounced.

“The last couple of years, there’s been quite a bit of silent internal rounds that have happened," said Anurag Ramdasan, a partner at 3one4 Capital. “In some cases, like some founders in our portfolio have told us that now they don’t want to do anything that brings attention to them, hence opting out of announcing funding rounds."

Ramdasan noted that startups also often choose not to announce funding rounds when they involve bailouts due to short runways, or small bridge rounds, with no incentive to disclose these rounds. Another reason to not disclose bridge funding is when internal investors cut down the valuation.

Investors’ dilemma

This, however, is a rarity. Many investors opt to fund through convertible notes not pricing the round at all, as a down round might impact risk perception and confidence in the company for the following rounds. This makes bridge rounds more common for companies that have had lacklustre performance in the recent past.

“Sometimes if there is general consensus that the company has grossly underperformed, if the company is degrowing and you give a down round, it’s a fair thing to do," said Ramdasan.

Recently, down rounds happened in case of startups like Meesho’s funding in May that valued it 20% lower from last round at $3.9 billion, Udaan’s funding in December that valued it at $2 billion, down from $3.2 earlier, and PharmEasy’s funding in March this year reportedly at a massive valuation haircut of nearly 90% at $710 million.

Meanwhile, with investors focused on stabilizing their portfolio companies, the likelihood of newer bets has gone down, also impacting the number of external rounds.

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Startups looking for shorter bridges, hence, do not see external investors participating in the round, let alone leading them.

“As the lead, I’m also doing due diligence on the company. Doing all that work for just 1% ownership (in a short bridge round) isn’t worth it. Personally, it only makes sense if I’m leading with double-digit ownership, but the company doesn’t need that much money," said Ramdasan.

He noted that if a startup is progressing towards better unit economics and profitability, an external investor might demand an additional ownership with secondary sale of shares, along with a shorter primary round.

However, if the company is moving towards profitability, existing investors would have little incentive to sell, Ramdasan added. “Existing investors want to sell secondaries currently only of a company which is either not doing well, or if they are really at the end of their financial cycles who have to desperately sell," he added.


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