Bengaluru: As Covid-19 continues to spread across the world and in India, creating curbs on travel and large business events, venture capital (VC) firms are advising startups and their portfolio companies to conserve cash and spend less, and brace for a possible uncertain fund-raising environment.
“What we are witnessing is possibly a once-in-a-lifetime event, which will, almost certainly, deliver the global economy a supply- and demand-side shock of massive proportion. We have warned all our portfolio companies early February to raise capital as soon as possible and focus on breaking even. Unless one is careful, all cash burn assumptions will surprise on the downside since cash-inflow will be below plans, other than a business which will benefit from the current situation," said Anand Prasanna, managing partner, Iron Pillar, a mid-stage, technology-focused VC firm.
Prasanna said the firm is seeing valuation expectations being reset in at least one conversation it is engaged in.
“...Multiple founders we are in talks with are now worried about supply shocks and figuring out how to consider that in their future plans. This is especially relevant for anyone who has products or parts of products coming in from China, which is a large bunch if you start peeling the onion. Exit environment will also thin out very soon."
Prasanna’s words come close on the heels of last week’s editorial post Coronavirus: The Black Swan of 2020 by marquee VC investor Sequoia Capital.
Sequoia highlighted the drop in business activity, supply chain disruptions, and asked founders and entrepreneurs to question their cash runway, fund-raising, sales forecasts, headcount and capital spending in an uncertain environment.
Suhail Doshi, founder of Sequoia-backed Mixpanel, described the message in a tweet as “RIP good times meets the coronavirus" and wrote, “Founders about to learn the survival skills of ’09." Indian startups had raised a record $10 billion in venture capital in 2019, driven by new sectors and emerging winners, despite a sentiment shift towards caution during the last quarter of the year. This was higher than the $9.6 billion and $9.1 billion in 2018 and 2017, respectively, though these were also record amounts, according to data from Venture Intelligence, a data tracker.
Kanwaljit Singh, managing partner, Fireside Ventures said there is certainly a possibility of business impact with the spread of Covid-19.
“The immediate impact is on the supply chain for businesses like boAT which depend on China for sourcing. While the current inventory was enough to manage the requirements till March, if the situation continues it will become difficult. Most of our companies have local manufacturing so that’s not been impacted so far. We believe there will be a direct impact on economy and consumption so we are advising our portfolio companies to also be cautious in their spending plans and conserve cash," Singh said, adding that though there hasn’t been any immediate impact on the investment front, but from past experiences especially in the 2008 and 2011-12 cycles, it would be prudent to be cautious
Anup Jain, managing partner, Orios Venture Partners said, “In general, we would advise seed stage startups to conserve cash as funding for later stages may get delayed as investors delay travel for due diligence. We don’t think there would be a fund raising and investment slowdown at seed stage unless the scare goes out of control."