Venture Capitalists on Startups, Funding and Post-COVID Challenges
While the first quarter of the year saw deals worth $3 billion being signed, Q2 till 26 June saw just 1/3 of that.
Term sheets dropped midway, brutal layoffs, and loss of end-stage contracts.
The last few months since the outbreak of coronavirus have been tumultuous for all businesses, but particularly precarious for startups. While the first quarter of the year saw deals worth $3 billion being signed, the second quarter even up till 26 June, saw just half the amount of investment at $1 billion, according to Venture Intelligence, a market research firm.
A survey of around 250 startups by National Association of Software and Service Companies (NASSCOM) released in May, revealed that 70% of startups had cash runway of less than 3 months. 90% had faced a decline in revenue while 30-40% had to temporarily halt operations or shut down completely.
While venture capitalists and industry members are exercising caution and adopting a wait-and-watch approach while still continuing to support late-stage startups, many believe that the startup sector will innovate and adapt to the changing market brought on by COVID-19.
Bengaluru saw the maximum number of deals being closed in the first six months of 2020, followed by Delhi NCR and Mumbai.
Hari Krishnan, a fund manager with Astarc Ventures, an early stage investment fund, said that the number of deals struck this year would be nearly 1/4 the usual due to the impact of coronavirus.
“The quantum of investment we make in a company has changed. In the pendulum of growth, it is skewed towards sustainability other than profitability, and becoming the market leader. Now, it’s more about sustainability. How do you make the runway last 2-5 years and not exhaust it in 12-15 months? That is the question,” he said.
Focus on Digital First
According to data maintained by Venture Intelligence, the second quarter of 2020 saw FinTech companies raise the most money through 21 signed deals. Other sectors that did well were healthcare, e-commerce, AI and education.
Nikhil Kanekal, independent analyst and entrepreneur said that investors were looking at going digital-first.
“They are not investing in brick and mortar, physical supply chain investment is low. They are gravitating towards online business: media, education in new investments,” he said.
Adding that there was a huge reliance on R&D, manufacturing and pharma, Kanekal noted that these phenomenons were only in the short-term.
“The focus will be on how these companies will be able to scale up supply sustainably. Companies have been hit hard, particularly early-stage firms and they are still figuring it out. It has been brutal on the human front as well. Companies will now have to start being more people-driven, be it B2B or B2C or large IT companies. This will have to be maintained to drive talent,” he said.
Echoing this, Krishnan from Astarc Ventures said that edtech, healthcare, online gaming were a few of the sectors Astarc was looking at.
“Any tools that will be fully digital are in demand. There is a shift away from physical and supply chain-driven businesses. Offline to online stores are also doing well. Maybe late stage investors will pump money into online grocery stores. The demand is there but the company should be able to beef up the supply side,” he said.
‘Tumultuous Time but had Interesting Second Order Effects’
Jaideep Singh Bachher, investor and founder of environmental intelligence start-up Ambee said that the last few months had been tumultuous but the company had managed to pull through.
“It was a pretty tumultuous time. We lost a contract that could have possibly made us profitable but we were able to pull through, other firms had it worse. However, I would say that that lockdown has been a boon for us. We have become twice as efficient with fewer distractions,” he said.
However, he foresees a demand for products in the environmental space and believes raising capital would not be an issue.
“We have observed an uptick in our user base. People are concerned about their health. In order to survive, companies will have to become super efficient and lean in what they do and cut down on discretionary spending. Investors are more prudent. They will go back to the essentials and ask: are you making money? Blind bets are going to reduce exponentially,” Bachher said.
Sahil Kini, CEO and founder of Setu, an API infrastructure company with a past in Aspada Investments, said that while the slowdown had helped people get better at remote working etc, there had been interesting second order results due to the lockdown.
“Companies started focussing on: what is our core strength? As financing fell apart and a new reality has begun to set in for people,” he said. He added that companies would still have to perform in order to raise capital from investors.
In most cases, it is 1-2 companies who return the entire fund. Funds are not for life, their patience is finite, nothing has changed there. If I want to put money in a company, then they have to deliver. Business is still business, you either grow or risk irrelevance. Adaptability is important.Sahil Kini
Adapt, Innovate to Survive
While well-run companies weathered the effects of the slowdown reasonably well despite the toll it took on certain sectors like mobility, non-essential commodities and tourism among others.
Romit Mehta, senior associate at LGT Lightstone, said that while online businesses were more resilient, other firms that were operations led managed to do well.
“Survival is key so companies across all sectors were forced to cut costs and effect layoffs. Mobility for instance, was badly hit as people were not moving around and social distancing was in place. However, this does not mean that the need has disappeared. It will just be different, adhering to new demands and protocols,” he said.
For instance, Vogo, a bike rental company used to only service point-to-point pickups. Now, they have started offering a more long-term package where customers can rent the vehicle for longer periods. There has been a surge in demand for this service.
“The mindset will change, investors will want to build resilience. People have realised how quickly businesses can shut down. The absolute growth mindset might be tampered, businesses will be more resilient. A startup’s survival strategy cant be from one fund raise to the next, has to be fairly routine,” he said.
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