Funding crunch healthy for startups as it’ll bring profitability to the fore: GSV’s Deborah Quazzo

Slowdown in funding is “healthy” for startups as it will make them reassess their models, said Deborah Quazzo, the managing partner at US-based GSV Ventures which has backed edtech unicorns, including Eruditus, PhysicsWallah, and Lead.

She said with investment slowing, startups will work with profitability in mind and will not be completely dependent on capital markets.

Quazzo told ET during an exclusive interaction that the pace of investments has slowed down in both the US and India and is likely to remain muted for the rest of the year at least.

The outlook on India remained “sanguine” despite a few bumps on the road, Quazzo, who is also an investor in edtech startups Classplus, Frontrow and gig worker networking platform unicorn Apna, said.

The market is still early in terms of edtech adoption, she added.

Quazzo said India is a 20-year opportunity. “I am very focused on India,” she said, adding GSV Ventures, which has invested in global edtech firms like Coursera, Class Technologies, Degreed and others, has so far deployed around $91 million here across its three funds.

“The biggest thing coming out of Covid-19 and its aftermath is that issues of learning and skills deficit are bigger, not smaller. So, the problem is not diminished, the problems actually expanded. Certainly, the numbers coming out of the United States are horrendous – in terms of learning loss for children in the K-12 system,” she said about the online education and reskilling sector.

PhysicsWallah, which raised its first round of institutional funding at over $1 billion valuation in 2022, is GSV Ventures’ largest investment in a single firm in India yet.

“It’s slower and that’s natural,” she said of the slowdown in venture funding in startups. However, she noted that there is a difference in the current downturn compared to the slowdown of 2000 or 2008. “It was an environment where it was easy to raise capital and companies were not seeing a lot of friction and in doing that and sometimes that causes a different approach to building your business,” she said, adding that the tightening of the funding environment is quite beneficial.

“A lot of companies (now)--compared to 2000 or 2008 are very well-funded. So, it’s been a matter of pulling back and having adequate runway and having your business model honed in a way that you can look forward towards profitability and not be wholly dependent on capital markets for funding,” she said.

This was a positive disruption, Quazzo said while noting that these shakeouts are generally “healthy”.

Quazzo’s comments assume significance as they come at a time well-funded edtechs in India are struggling to continue their growth which was fuelled by Covid-19 creating immediate tailwinds for the sector.

Compared to $4.1-billion funding in edtech firms in 2021, about $2.6 billion was invested last year. Almost all firms have had to lay off a significant chunk of their employees along with undertaking major restructuring in the business.

Quazzo said the current environment really shows which companies have agility and flexibility and can think on their feet. “And can pivot if they need to. And it's an important environment for companies to live through and it's an important environment for investors to be really supportive. It's a lot more stressful for founders than when everything is going great and people are throwing money at you,” she added.

Is consolidation coming?

Quazzo said consolidation is inevitable. While startups like Byju’s spent well over $2.5 billion in 2021 to acquire several firms to bulk up presence across education and reskilling, consolidation is expected to be on the cards as survival becomes tougher for many without adequate capital.

“We think it is inevitable (consolidation). People would prefer to have some consolidation of purchasing. So, I think you're going to see some natural consolidation. It will be a different consolidation if a company is struggling to last through…and doesn’t have the capital. They need to sell. We are certainly seeing some of that activity in the US at this point and have seen a little bit of India,” she said.

“Obviously there were issues with customer acquisition cost (CAC) here and I think that was something companies had to adjust to. Some of them have done well, and some have struggled. So, I do think the next wave of different companies is coming around what's happening with generative AI and some existing companies that have got some very interesting next legs based on that,” Quazzo said.

She also stressed that while the slowdown is noticeable it won’t be permanent.

“There are interesting things happening in the higher education market in India,” she added, explaining that more innovative ideas are coming from startups in the space. Quazzo is in India currently to attend the GSV Ventures and Emeritus summit on edtech.

Valuation corrections

Quazzo, who sits on the board of most of the Indian edtech firms the fund has backed, said valuations are substantially down in the secondary market deals of edtech firms, with some exceptions.

“I don’t think we have enough data on where the market really sits. What we're doing is we look at things like discounted cash flow and what we believe a company can do in five years and does that hit our underwriting threshold,” she said.

According to Quazzo, a lot of companies were able to raise capital and they can manage businesses. “If their last valuation is sitting above what a fundamental value would be today, many of them would be in a position to actually grow and manage the company through to the valuation,” she said on valuation corrections and outlook for companies.

The exceptions to this trend, according to her, include players experimenting with generative artificial intelligence, propelled by the mass acceptance of ChatGPT.

Tight ship

Deborah said that there are no companies in GSV Ventures portfolio that haven't tightened their belts as yet.

“Every person they got and every dollar is well spent and that their burn is in a good place. Every company is just routinely tightening and their runway is longer and the business is managed as tightly as possible,” she said, explaining the current thinking at portfolio startups.

“In our business, it's all about option value and I'm not talking about any specific companies, but if it's an option of like being around to fight another day so you can achieve that valuation– yes you need to slow your growth in order to slow your burn to get there,” Quazzo said. This, according to her, is obvious advice to give to founders.