I started as a VC analyst in the summer of 2016

Unbeknownst to the young me, it was going to be a startup winter. The Indian ecosystem had one of the best growth years, raised immense amounts of capital and was hiring.

Then suddenly, in the middle of 2016, winter hit. Funding dried up. People were laid off. Founders were apparently held hostage

Well funded companies like Housing, TinyOwl, and Runnr all went under. It was a chastening time for everyone involved. But serious founders still picked up the ropes and began to build in 2016. 

History rhymes, and in 2022 change has come fast for Indian startup founders. It is for this reason I'd written a piece 6 months ago that Startup Winter is here.

In a few months' time, headlines have shifted from heralding unicorns and big-ticket funding rounds to announcing layoffs and shutdowns. 

The sentiment has turned pessimistic and markets are off their peaks. Investors have tightened and are more cautious about where they deploy funds. Founders have called off IPOs and some have announced the onset of winter. 

‘Profitability’ and ‘cash flows’ are the new buzzwords in town. No more growth at all costs. 

High inflation and a hike in interest rates have squeezed liquidity and led investors to cut down investment in private markets. Unlike the euphoria of 2021, we predicted India’s unicorn list isn’t quite expanding as fast this year. 

https://ajuniorvc.com/2022-predictions-2021-recap-ipo-d2c-fintech-indian-startup/

If you are a founder, investor, employee or anyone following the news, you might get a sense that, in some shape or form, a downturn is here. If you are running a business, this might be one of the most challenging climates you will face. 

Downturns are characterized by an increase in uncertainty about the future - demand decreases, revenues dip, investment slows down and companies jump into survival mode. 

This is a high-pressure effort in managing change, redrawing projections and estimating when companies might run out of cash.

This is also a time that might separate the wheat from the chaff. 

Examples from the dot com bust and the 2008 financial crisis show that companies that do well in such an environment tend to flourish, outdo the competition and prosper in the long term. Those who barely limp through tend to shut down, go bankrupt or get acquired.   

What are some of the things that the survivors do? 

Fundamentally, those who emerge from this time ensure they don’t run out of cash. Lower revenue and decreased funding leave companies struggling to fund operations. 

Highly leveraged companies are at high risk of default and are often the first to resort to massive spending cuts and layoffs. 

Shed assets and deleverage where and when possible. 

Considering to deleverage on spotting a downturn could be a good strategy. High debt outflows eat into core operations and leave little room to take advantage of new business lines or pivots. Issuing equity or shedding non-core assets might help reduce leverage. 

Apart from the balance sheet, leaders might do well to take a hard look at the organizational structure. At the onset of a difficult time, it is tempting to take charge at the helm and steer the ship through a storm. 

On the contrary, research shows that decentralized firms tend to do better in tough environments. These firms delegate decision making to teams that are closer to the ground and can adapt quickly to changing conditions. 

For example, local teams might respond faster to changing demand by launching new products, undertaking innovative experiments and making quicker hiring decisions. 

The value of local information increases. An example of such an adaptation was mobility firms ramping up auto-rickshaws on their platform when customers feared the enclosed space of a car. 

Each city has different regulations for offering services and decentralized teams adapt relatively faster. 

Even with nimble organizational structures, no downturn is complete without layoffs. To trim their balance sheet, companies are quick to downsize their workforce. In 2009, 2.1 million Americans were laid off.

Indian startups have sacked thousands of employees already. Those who get to keep their jobs might face pay cuts, lower bonuses or slower growth. 

While layoffs might seem inevitable given the changing context, studies find that the survivors generally rely less on layoff and instead focus on operational improvements. Layoffs demotivate the workforce and seed fear in their minds, thus decreasing morale and productivity. 

Moreover, hiring back employees during good times is not cheap. Quick layoffs might temporarily cut costs, but prove more expensive in the form of hiring, training and onboarding new employees. 

But how do companies cut employee costs and conserve cash after all? There are no easy decisions. 

Shifting to performance pay - based on business outcomes or goals - could help align incentives and still keep employees. Allowing employees to take on broader responsibilities and develop cross-functional capabilities can reduce future hiring requirements. 

Given the uncertainties that prevail, companies are often tempted to stick to what has worked for them in the past and make safer bets. However, this might be a great time to assess new technologies, and invest in IT and deep-dive customer analytics data.

Technology is a great way to break the trade-offs between cost and speed. It can make your business more flexible and efficient - think digital training tools, automated reports, digital supply chains, and location intelligence. 

Investing in better data sources and infrastructure can help to understand threats quicker, discern and respond to customer trends and replace the many people-driver processes. A low demand phase is a good time to re-look at your back-end tech stack, DevOps tools, API integrations and big data software.  

The economics argument for such investment is that the opportunity cost is lower compared to good times.

When demand is strong, you want to channel all resources to producing goods and services and shipping them as soon as possible. Leave no money on the table. 

A downturn is a good time to make such investments as they do not hamper core operations and help to build a better foundation for when demand and investments return. 

Finally, the winners care for their partners, suppliers, gig workers and customers. As Ned Stark says in the Game of Thrones, in winter the lone wolf dies, but the pack survives.

While this might sound good in theory, bad times often lead to tensions as players try to isolate themselves from the damage. 

Sharing your strengths and looking out for the ecosystem might be a better strategy to weather the storm. 

Look to win rather than survive. I’ve seen that the smallest wins can have an outsized impact during downturns. Remember, while the good times don’t last forever, downturns don’t either. Cycles turn and bottom out in due time. 

I think it will be a great time to hire, build, raise. The most serious builders were build, most serious employees will join and most serious investors will invest. Creative destruction is necessary to reset.

If winter comes, can spring be far behind?