Rajeev Kalambi

Hope is not a strategy, businesses need to make tough decisions and move on

The decline in startup funding in 2023 to a five-year low figure of $7 Bn as compared to $25 Bn in 2022 (Source: Tracxn) has been the cause of frantic calibration in the startup ecosystem. We spoke to Rajeev Kalambi, General Partner, Cactus Venture Partners, to catch the pulse of the startup ecosystem in India and what to expect in 2024.

Below are excerpts from the exclusive interview.

Will the funding winter thaw in the New Year? What are the market sentiments?
Rajeev Kalambi: The 2021 euphoria and subsequent downturn have affected a lot of investments that were done at high valuations. Lots of funds will have to take down rounds. Many founders who need capital for the business but have some cash runway are deferring their fundraises.

I think that is what we’ve seen play out in all of 2023 and I suspect that it’s not going to be like a V-shaped or U-shaped recovery during 2024. It’s not going to be a quick bounce if that’s what people are expecting. I suspect it will be a gradual build-up. This skepticism that has crept in will continue for at least the first half of the year, if not for the first nine months.

Rajeev KalambiWhat investors are probably thinking is: “How can we find new companies and new business models where founders are focusing more on the unit economics rather than on blitz scaling with no regard for profitability? There has been some semblance of common sense that has crept in. It doesn’t make sense to give 20X/ 25X or whatever multiples that businesses have received in the past. It just doesn’t make sense any longer.

To cut a long story short, I think that the number of investments will build up a little bit more during 2024, but it will not be a quick recovery. 

Valuation of multiple contractions is one of the key outcomes. The challenge is that most companies and investors do not want to take a down round. So they will try and kick the can down the road as far as they can (in terms of fundraising) in the hope that the markets and valuations revive. 

But I don’t see valuations moving up significantly from a revival perspective. So they will keep pushing until it becomes difficult and they have no option but to go in for a fundraise at which time they will take the down rounds. 

Hope is not a strategy. Quite often businesses need to make tough decisions and move on.

So, to answer the question: What’s going to happen in 2024? We are likely to see a lot of down rounds.

Top funded sectors What is the difference in the quality of startups getting funded today versus startups that were funded in 2022 and 2021?Rajeev Kalambi: Our strategy has always been to look for relatively seasoned founders. I don’t know what the market will expect and what other funds have as a strategy, but we seek founders who have a strong track record in whatever they have done. 

Professional founders would have built a strong repository of learnings from what they did in their previous job and they’re now using that knowledge to build a new business model, ideally in the same sector. For example, it doesn’t make sense if someone has been in logistics and decides to start something in healthcare.

Startup funding 2024To answer the question, how is that compared to what used to happen? There was a period a couple of years ago when we saw several funds backing entrepreneurs fresh out of IITs/ IIMs etc. I suspect that will not happen too much going forward.

Investors will want to back founders who have at least eight to 10 years of work experience. I suspect that might be a big change. And that automatically implies that the number of deals will reduce as a result.

What are the hot sectors? 

Read the full interview in our new report: ‘The Great Metamorphosis: Private Market Investing Outlook, Insights & Projections, 2023-24’.

Download the Report Now

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