Venture capital (VC) funds made hay while the sun was shining. They pumped billions of dollars into new-age startups, and drove entrepreneurs to aggressively chase top line growth. And despite the absence of a robust business model, they boldly defended the inexplicable sky-high valuations of many of these firms that hardly showed profit visibility. In fact, it was considered blasphemy to question founders on when the business would break even in light of the hefty losses quarter after quarter.

The astronomical valuations came on the back of irrational and lopsided top line growth that came at the cost of unit economics, based on the underlying assumption of a ‘huge’ growth potential that could be readily unlocked for value and profits once the business reached the desired scale and size.

The market was fairly new-age, largely untapped, and was riding the wave of Internet penetration. This optimism was backed with high consumer spending, and signs of robust economic growth—and this contributed to the perplexing and rocketing valuation of startups.

Critics questioned the rationale behind the valuation of many of these new-age startups, a few of which at certain points exceeded the market cap (m-cap) of decades old blue-chip companies. But, no one was complaining. The startup ecosystem was the cynosure of all eyes. Customers lapped up the freebies, steep discounts, and convenience of the new experience. And, to ensure there was no love lost, startups continued to increase marketing and customer acquisition spends to dole out offers that were bigger and better than industry peers. This, of course, was done by burning investors’ money. But most investors, intriguingly, encouraged founders to keep their eyes on meeting revenue targets to scale the business, even if the business was slipping heavily in the red. Why?

Higher valuations present the opportunity for most VC funds to exit profitably in five-eight years at attractive return multiples on the capital invested. Funds like Tiger Global, for example, continued to bet on the assumption of the underlying growth potential of startups, and with each round of funding, the valuation increased to tens of billions of dollars. For instance, after a little over eight years, it cashed out its investment in Flipkart and made a killing by earning over $3 billion from its $1 billion investment. More and more funds have tried to replicate the model, contributing to the boom in the startup industry. Alas, many have burnt their fingers and have now left the very founders they encouraged in the lurch. Why?

The economy is grappling with multiple challenges, the optimism and robustness have been replaced with liquidity concerns and a weak outlook for demand. The unravelling economic upheaval has not spared startups. And, VC funds have been quick to take the cue for an urgent shift in tact and track.

“Investors want to see a solid business model with fundamental unit economics when they scale. Too many VCs have backed consumer businesses that were reliant on discounting at launch but who then failed to maintain sales when discounting was stopped. VCs have their hands full dealing with issues within their portfolio and [are] not looking as aggressively at new deals until they sort out their current issues,” cautions Singapore-based DSG Consumer Partners in a letter to the chief executives and founders of its portfolio companies.

“Valuations are correcting. We are seeing a 30%-50% reduction in the multiples being applied. CPG [consumer packaged goods] brands, which were once getting priced at 5-8x revenue, are now priced at 3-6x—only specific to brands with strong gross margins, not reliant on high CAC [cost to acquire a customer]. Retailers, including restaurants, are seeing Ebitda multiples of 6-12x, which is 0.5-2x revenues,” says Deepak Shahdadpuri, founder and managing director, DSG Consumer Partners, in a letter dated November 21.

The confidence for a blockbuster, multi-bagger exit has diminished, too. “We are witnessing a rapid decline in risk appetite from VC funds. This is a sharp contrast to the market sentiment six months ago. In the past three weeks, we have seen five different fundraising rounds or M&A (merger and acquisition) discussions collapse post-term sheet and pre-closing. In some cases, this has led to job cuts and deep cost rationalisation, some within the portfolio and some outside. Many startups aren’t even getting a term sheet,” adds Shahdadpuri. “We believe that the winter is already here in the VC market,” he warns.

For now, the bubble of euphoria may have burst and it’s back to business basics, finally. DSG Consumer Partners expects liquidity to be tight in 2020 and has cautioned founders of its portfolio companies—comprising OYO, Chai Point, Raw Pressery,, and Veeba, to name a few—to conserve cash and focus on capital-efficient growth. “Build a business to be profitable. Look at your P&L [profit and loss] and ensure that each cost item is justified and required; if not take out those costs today,” it advised startup founders.

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.