After high-profile firms like WeWork struggle, how is the startup space shifting?

This article is from an episode of Matrix Moments by Matrix Partners India, a podcast featuring candid conversations on what it really takes to survive the startup world. This is heavily revised from the original show transcript. For the full interview, go here.

Today’s guest is Avnish Bajaj, founder and managing director at Matrix Partners India, and we’ll be talking about the current startup landscape amid the challenges of some high-profile startups.

Photo credit: Eloise Ambursley

Let’s start with the elephant in the room: WeWork. What do its challenges mean for the startup ecosystem? Do you think there are more companies like them?

I think the biggest change that has happened is that the growth-at-all-cost mentality has gone away.

Unfortunately in the past, what has happened is that companies with this mindset have been funded in various ways. But the ultimate source of funding is the public markets, and the public markets have passed a verdict – not just on WeWork.

I was reading statistics on the last 10 to 12 companies that have gone public which were loss-making. I think 70% are trading below their prices, including Uber, Lyft, and so on.

Does it have an impact across the ecosystem? Absolutely.

I think one needs to understand the food chain of funding. It starts with the initial public offering; it doesn’t start with a late-stage private equity round. The market is sending very clear signals, which is that models have to make sense, economics has to make sense – there has to be a path to profitability.

What has happened over the last three years is that people were able to delay listening to that message because of all these private rounds. So I think there has been unsustainable behavior, which has been fueled by very low-cost capital. That story is ending.

It sounds like the impact – the way you’re characterizing it – is going to be more pronounced with later-stage companies than early-stage firms.

IPO, later stage, early stage, seed – the impact will make its way down.

We have done a lot of seed rounds; our peers have done a lot of seed rounds. Assuming that startups can’t raise the next round of capital, we would have to put in that round of capital or some version of that. Therefore, each stage starts drying up, so there will be an impact.

Now there is a contrasting argument. While it doesn’t change the fact that there will be a correction – and it will be a deep one – it does change how soft the landing can be. The good news is that the market has deepened, and entrepreneurs are far better today. They have been improving with every cycle. Some of these founders are mid-career; they are not going to fail.