Startup Lifeline: How Existing Investors are Saving Struggling Companies

Startups Seek Bailouts: A New Reality in Funding

As the funding landscape shifted in late 2022, many startups found themselves in a difficult position. With their last funding round a distant memory (over 24 months ago), they faced dwindling funds and a growing need for additional capital.

This challenge is known as "crossing the death valley" - a period where startups have launched but haven't yet achieved profitability.

Traditionally, this period was limited to early stages when startups had little to show in terms of revenue. However, the post-2021/2022 funding frenzy changed the game. Even established startups with high valuations are struggling to attract new investors.

The shift: Investors are more cautious about valuations, forcing startups to return to their existing investors for bridge funding rounds. These rounds offer a shorter runway (2-3 quarters) and are seen as a temporary solution for startups that don't want to face the current valuation landscape.

Bridge Rounds: A Common Occurrence

While funding for Indian startups reached a high in June 2024, a significant portion of this increase was due to internal investors. Companies like Zepto, Purplle, and Rocketlane all received major funding from existing investors.

Many bridge rounds remain unannounced, especially those that involve bailouts or smaller amounts. Founders often choose to remain silent to avoid negative attention.

The Dilemma for Investors

Investors face a difficult decision: provide down rounds or convertible notes, which could impact the company's future fundraising efforts, or risk losing their investment altogether.

Down rounds are becoming more common, with recent examples seen in Meesho, Udaan, and PharmEasy. This highlights the current market climate and the pressure on startups to deliver strong performance.

The Future of Funding: A Bridge to What?

With investors focused on stabilizing their existing portfolio, the likelihood of new investments has decreased.

For startups seeking bridge funding, external investors are less likely to participate due to the small ownership stake offered in these short-term rounds.

The future for startups hinges on their ability to improve unit economics and achieve profitability. Until then, bridge funding from existing investors provides a temporary lifeline, but ultimately, the survival of many startups depends on a shift in the market and a renewed confidence in their potential.