2021 kind of funding environment isn’t coming back for a very long time: Sequoia’s Rajan Anandan

The extraordinary exuberance of valuations, deal velocity and the pace of transactions of 2021 will not come back for a long time, Rajan Anandan, Managing Director at Sequoia Capital, said. 

Speaking at NASSCOM Product Conclave 2022, Anandan said the funding environment has gone back to the 2018-19 levels with venture capital focus shifting back to quality of start-ups, which is a healthy dynamic for the ecosystem. 

“There are still founders in the market who think 2021 will come back. The year 2021 isn’t coming back for a very long time. We are really back to 2018-19 type of funding environment. Right now, the pursuit of quality is high,” he said. 

According to a report by Nasscom and Zinnov, start-up funding grew two-fold in 2021 to touch $24.1 billion. As per data from Tracxn, Indian start-ups raised $752 million in funding in the month of September 2022, down by 83 per cent as compared to the same period last year. 

Anandan said valuations have corrected significantly at growth stages and are beginning to correct at seed stage. 

“We're really back to reality and what that means for start-ups is that we're back to quality. You've to have a very high-quality business to raise funds. Last year, you could've raised Series A capital without product-market fit, this year you won't be. Series B, C rounds wouldn't be possible if you don't have strong unit economics today whereas a lot of companies were raising rounds with broken unit economics last year,” he said. 

He advised founders to accept a down round if their runway is limited while asking those with sufficient cash balance to leverage the market advantage to grow. 

“If you're running out of capital and you've less than 6-8 months of capital, you should take capital even if you've to do a down round, even if you don't like the terms. If you've 18-24 months of runway and you've strong unit economics, you shouldn't be raising (capital) now, you should be growing. It's a great time to accelerate, because everybody else is on the defence, you go on the offense,” he added. 

Anandan’s advice to start-ups to tide over the funding winter is to find great product-market fit and build strong unit economics. “If you are an early-stage company, focus on getting to unquestionable, extraordinary product market fit. If you don’t know what it means, please find a mentor who can help you determine that. Late-stage companies should make sure you build a very powerful economic engine,” he said.

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