FTX downfall: Lessons galore for start-ups

CHENNAI: The ripples of the FTX collapse have arrived as crypto winters become colder and harsh. They have had a strong impact in India as start-ups scramble to raise capital even as venture capitalists retreat into their shells.

Venture capital funding in India fell to a 21-month low in the July-September quarter, with just $2.8 billion raised in 387 deals, as opposed to $9.8 billion raised in 525 deals during the same period last year. However, all isn’t lost. It’s Darwin’s theory all over again - survival of the fittest! Nature selects the best and rejects the rest. Don’t for a minute ignore this!

Strong start-ups will survive these shifting dynamics. Using the Darwin model learn to endure for most start-ups will go through this phase at least once. A time for gaining experience and knowledge while strategising the business model. Start-ups now will need to make significant changes to their models and founders will need to shift attention away from valuations and toward cash flows.

The future is gloomy for firms that require outside funding to thrive, which may result in mergers, acquisitions, or in the worst situations, shutdowns. Start-ups will need to now consider alternate survival strategies in the current market, where the funding criteria have tightened and valuations are under pressure. Start-ups that depend heavily on funding for their survival and expansion frequently conduct dis-tress sales or abandon ship. Now they will also need to lower their expectations of value if they want to survive. This is especially true for late-stage entrepreneurs, who will need more funding and must also show a way to make money. Late-stage start-ups however will have the most difficulty attracting new funding as values are reset and profitability is once again prioritised. Along with the shifting market conditions, valuation expectations also need to be moderated.

Good start-ups will be able to get money, but they must be more tolerant of the valuation multiples. Efficient markets require some multiples correction. However, many businesses have and ought to be open to strategic recommendations from more established corporations or larger peers Founders should focus on cutting expenses to make room for larger runways. A large portion of those who would not pass the test have a utopian vision of going up beyond their capabilities. Fundamentals like product demand, a quick product development cycle, and managed capital expenditures are essential for startups now.

Focusing on a certain niche or target market, at least early on in its journey, is a crucial element of a successful start-up. A captive market and a focused, long-term business model is what leads a start-up towards success.

For now, start-ups should avoid the idea of expansion at all costs and concentrate on capital efficiencies. Focus on fundamentals and cash flows as they are responsible for undergoing the start-up’s mentality adjustment. The founders’ survival instinct, ability to steer the company down a clear economic route, inherent modesty, and lack of interest in gaining notoriety for its own sake are all assets. All clouds have a silver lining. Dig your heels in and back yourselves - that is my advice. This too shall pass.

(The writer is Founder, India Blockchain Alliance)