In March, top Silicon Valley VC firm Sequoia Capital in a note to its portfolio companies labelled the coronavirus pandemic “the black swan of 2020”, one that would have far-reaching implications.
A CRISIL survey conducted in May and June revealed that 90 percent of private equity and venture capital investors estimated a drop in fund-raising activities over the next six to 12 months on account of COVID-19.
As the ramifications of the pandemic on VC investing and startup funding unravelled, investors hit the pause button.
But a few months down the line, things are looking up for the Indian startup ecosystem.
According to KPMG Private Enterprise's Venture Pulse Q2 2020 Report, India remains a key market for investors despite the slowdown in VC funding. “The ongoing interest in India is expected to help keep VC deals occurring in the country, if at a slower rate. While Q3 results may also be soft, investment is expected to rebound by the end of 2020,” the KPMG report said.
The silver lining
Despite the slowdown, leading VC firms are setting up India-focused funds. In July, leading global VC Sequoia committed $1.35 billion to new India funds, including a $525 million venture fund and a $825 million growth fund.
Shailendra J Singh, Managing Director of Sequoia Capital, then said, “Sequoia India now operates seed, venture, and growth funds - a structure that allows it to remain a relevant partner for founders at all stages of their journey. The three Sequoia India funds will continue to invest across India and SEA.”
In a similar vein, albeit at a lower scale, Lightspeed in August announced the closing of the Lightspeed India Partners III Fund with $275 million of committed capital.
Singapore-based VC fund Beenext in June announced that it had raised a $110 million fund aimed at startups in India and Southeast Asia. The fund aims to invest about 50 percent of the amount in Indian startups.
These announcements came as welcome relief amidst the COVID-19 environment, which has been distressing for startups from the funding perspective.
YourStory in its 2020 H1 funding report revealed that Indian startups raised a total of $4.16 billion in equity funding for the first six months of the current year, a decline of 14.7per cent from a year ago.
Booster shot for startups
However, the interesting thing is that the first three months of the year — January to March — saw a total of 199 equity deals that accounted for nearly 72 percent of the total funds raised in the first half. The second quarter, which ended on June 30, bore the full brunt of the COVID-19-induced lockdown.
Deal activity slowed dramatically, comprising only 28.1 percent of the total funds raised in the first half of 2020, the YourStory report said.
Given this background, the launch of new funds from the likes of Sequoia and Lightspeed comes a booster shot for the Indian startup ecosystem. Their launch during the time of COVID-19 is a strong indication that the India story is very much alive.
Shailendra said, “The combined GDP of India and SEA is expected to cross $14 trillion and the number of mobile internet users will likely cross 1.5 billion by 2030. This region will become home to a number of massive technology companies during the next decade.”
Betting on India
In the current political and economic environment with heightened trade tensions between the US and China, India is a safe bet for investments. It also has the added advantages of the geography and population.
Rutvik Doshi, Managing Director, Inventus Capital India, said, “This is a positive development and shows that people have not given up on the India story. It only gets stronger by the day.”
V Balakrishnan, Chairman, Exfinity Ventures, said, “These VCs are able to raise new funds specific to India investments because of their past track record.” This indicates that limited partners in these VCs are confident that these funds would continue to give them positive returns.
The COVID-19 pandemic has had a huge impact on the Indian startup ecosystem with many companies announcing job cuts, revision of salaries, and putting future plans on hold.
This has also had a bearing on the kind of funding that came into startups, with small and early-stage deals dominating. The YourStory report on H1 funding noted that 392 deals were struck during the period, up 3.2 percent from a year ago, indicating that the average deal size shrank with the total funding size falling.
“The average deal size slipped 17.2 percent in the first half of 2020, to $10.6 million as investors funded more deals, but took money off the table,” the report said.
But after the initial panic, a semblance of normalcy seems to be returning to the Indian startup ecosystem. Big deals may be missing, but VCs are betting on new companies.
Prashanth Prakash, Co-founder, Accel India, said at a recent meet organised by TiE New Delhi-NCR: “There was a bit of a lull between April and June, but there has been an aggressive bounce-back from July.”
He adds that deal making at Accel India is now at “one to two per month”, almost at the same level as last year.
The focus areas
In the current environment, the investment focus among VCs has been on segments like Software as a Service (SaaS), edtech, and consumer internet with specific interest on direct-to-consumer brands.
Other sectors that are attractive to investors due to their applicability in the current environment are health, biotech, pharmaceuticals, and life sciences.
According to KPMG, consumers are being forced to embrace new behaviours. “These changing behaviours could have significant staying power over the longer term, and could drive stronger investments in these spaces and more sustainable business models. Those who do not move very well may not be able to survive.”
While launching its new fund, Lightspeed said this year began with “a crisis like no other”.
“It is always tough to start a company; it requires passion and leadership - and in these times, it requires more courage than ever before. Lightspeed believes this is when the best entrepreneurs and companies of the future will emerge. Strong founders are utilising the tailwinds of India’s digital ecosystem growth to build out a new future and Lightspeed is strongly committed to backing these founders.”
At the same time, the nature of VC investing needs to be kept in mind. These investments are not made with a focus on short-term gains; they are made with a long-term perspective.
So, even LPs who put their money into such funds have a minimum horizon of five-plus years.
“I would have to say that VCs are little more immune to these economic cycles because they have a long-term view,” Rutvik said.
Challenges and the future
But amidst these positives for funding, VC funds that are not global and have a limited area of operation face challenges.
Smaller VCs are finding it extremely tough to raise fresh capital in the current environment as travel is restricted. It is imperative for them to meet LPs in person to build relationships.
“We may meet around 200 LPs before 15 agree to put their money into our fund,” a VC said.
A venture capitalist, seeking anonymity, added: “Global funds have very stable and steady LPs in their fold so it is not difficult for them to raise fresh capital.”
That said, the India story remains a powerful magnet that continues to attract VCs across the world, given the talent pool, maturing ecosystem, and tech-savvy generation of consumers. This is why the entrepreneurial fervour remains very strong despite COVID-19.
According to Oxford Business Group, “Startups that performed well during the implementation of social distancing and lockdown measures might offer favourable opportunities to investors amid the uncertainty, while the changing investment environment is set to add impetus for greater collaboration and renewed risk evaluation.”
Shailendra said, “We are at a fork in the road, and everyone has a choice to make. From our vantage point, the future of our region will be shaped by those few founders who are resolutely committed to building enduring companies with unshakeable foundations.”
(Edited by Teja Lele Desai)
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