News Update

Gokul Rajaram predicts company failures, shutdowns, and down rounds in next 9 months

• ByStartupStory     |    April 1, 2023

Gokul Rajaram, a well-known solo capitalist, operator, and angel investor who has invested in 300 firms, including Faire and Airtable, has suggested that entrepreneurs consider closing startups that have raised roughly $10 million in funding but have yet to find product-market fit (PMF). Rajaram’s advice comes as startups continue to struggle to gain traction, and he believes that shutting down unproductive ventures can free up resources and provide opportunities for new ones to flourish.

Gokul Rajaram, known as the ‘Godfather of Google’s AdSense’ and a former product director of ads at Facebook, is an angel investor and advisor for several Indian startups, including Cred, Curefit, and Whatfix. In a recent interview with ET, Rajaram predicted that the next nine months will see many companies failing, shutting down, and going through down rounds. Despite the challenging business climate, Rajaram believes that entrepreneurs who are resilient, nimble, and customer-focused will continue to thrive.

According to Gokul Rajaram, the reason why startups are struggling to find product market fit (PMF) is that they raised significant amounts of capital even before achieving PMF. While in the past, founders only raised large rounds after achieving PMF, many startups in 2020-21 raised capital despite not having PMF or having PMF induced by the pandemic. As the demand for their products or services declined after the pandemic, their lack of PMF was exposed. Rajaram noted that this is a unique situation that has never happened before, and there is no playbook for dealing with it.

A correction is inevitable, and companies need to be prepared to do down rounds to correct unrealistic valuations. This will not impact customer loyalty and will make employees happier. Founders should focus on solving meaningful and large problems with differentiated products that are not commoditized. If these two criteria are not met, they should consider pivoting, merging, or shutting down the company and returning capital to investors, as the opportunity cost of wasted time is too high. It’s crucial to have enough capital for the next 18 months to survive and continue building towards the vision.

The current seed ecosystem is experiencing a surge of activity as high-caliber founders from companies such as Meta, Google, and Amazon, which have undergone layoffs, are entering the scene. Additionally, Generative AI has provided a significant impetus and technological foundation for companies to build on. SVB, as a tech-forward and tech-friendly bank, has played a valuable role in this ecosystem, with a noticeable difference in service quality as compared to larger, more traditional banks.

Investors cannot escape their share of the responsibility. The zero-interest rate frenzy caused all of us to overfund startups that lacked PMF, defensibility, and unit economics. Now that the party is over, we are dealing with the resulting hangover. However, this painful period is necessary for cleansing our system. 

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