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Despite tales of doom, India story draws VCs

The travel and hospitality sectors will take the longest time to recover from the slowdown due to covid-19, but the impact will vary depending on the nature of the business. In Germany, travel operators have been gathering at Berlin’s Brandenburg Gate to demand government support.Premium
The travel and hospitality sectors will take the longest time to recover from the slowdown due to covid-19, but the impact will vary depending on the nature of the business. In Germany, travel operators have been gathering at Berlin’s Brandenburg Gate to demand government support.

  • The covid-19 pandemic might spawn a more digitalized business environment and a healthier VC ecosystem
  • Funding has been mostly going to established startups and founders. The action remains muted for early-stage ventures

Investors evidently haven’t lost their appetite for Indian startups, as funding levels have risen again after a dramatic fall in March when covid-19 was declared a pandemic. The caveat is that most funding is for existing startups to ride out the pandemic. New deals are in limbo.

Indian startups raised $15.33 billion in funding last year, according to venture capital data tracker Tracxn. That comes to $1.25 billion a month on average. The trend continued in January and February this year, with $1.2 billion and $1.1 billion in funding. Then came the pandemic.March saw startup funding fall to $534 million compared to $1.73 billion in the corresponding month of 2019, shows Tracxn data. Venture capitalists (VCs) scrambled to adjust to a post-pandemic world.

The immediate focus was extending runways for portfolio startups. Measures like cost-cutting came in, but that can only go so far. The other recourse is internal funding from existing shareholders, which doesn’t always show in announcements.

“Most of the VC funds active in India raised money in the last two or three years. They have a substantial amount of dry powder to deploy if they think a particular company or sector is right," says Pankaj Makkar, managing director, Bertelsmann India Investments. “VCs may give capital to their startups to help them to survive. The general consensus is that a minimum of 12 months and preferably 18 to 24 months of capital should be with a company."

Back to pre-covid levels

Interestingly, even disclosed funding is almost back to pre-covid levels, with nearly a billion dollars invested in April and a number of large deals recorded in May. That’s excluding the $8 billion poured into Reliance Jio by Facebook, Silver Lake and Vista Equity Partners, with more to come soon from Saudi Arabia’s Public Investment Fund and US-based General Atlantic.

The Jio effect has helped startups by building out digital infrastructure, dropping data rates and boosting smartphone usage. Now there will be new plays in collaboration with Facebook, such as doing business over WhatsApp.

Much of the post-pandemic VC funding is aimed at shoring up the capital base of consumer internet startups, which have taken a revenue hit amid lockdowns. Cloud kitchen Rebel Foods raised a $50 million series E round, Swiggy raised $43 million, NoBroker raised $30 million and B2B marketplace Udaan had a $30 million series D round. Sectors like logistics, payments and healthcare, which are more in demand, have attracted funding.

The fintech space, especially lending, is on slippery ground as the economy has nosedived. But a number of fintech startups have got funding with a long-term view, including Navi co-founded by Flipkart co-founder Sachin Bansal, which bagged $420 million in April.

Funding has been mostly going to established startups and founders. The action remains muted for early stage ventures, which is worrisome because good innovations may die out simply because of bad luck with timing.

SAIF Partners is one of the leading VCs in India which likes to get in at an early stage as the first institutional investor and then keep participating in subsequent rounds as a startup grows. It did that with Paytm and MakeMyTrip in its early days and continued that game plan with Swiggy, Meesho, ShareChat and UrbanClap more recently.

It was business as usual with new investments in the first quarter of this year. “We signed 10 new term sheets and all of them are in the process of getting closed," says Mayank Khanduja, principal at SAIF Partners. That’s in fact better than in 2019 when SAIF signed only 10 new deals in the whole year from its $350-million India-dedicated fund it raised in 2017.

But the covid effect kicked in from April as no new term sheets have got signed in the past month and a half. That the VC’s focus shifted more to managing existing startups is evident from its participation in follow-on funding rounds for Capital Float, FarEye and NoBroker from the SAIF portfolio during this period.

Khanduja attributes two reasons to this. One is the obvious priority given to helping shape their startups’ response to the crisis. The other is social distancing. “We’re continuing to interact with the same number of new companies as before, but we haven’t reached a stage where we’ll sign a term sheet," says Khanduja. “I think the VC industry will get to a point where we’ll be comfortable signing a term sheet with a company we’ve only met over a video chat. But we’re not there yet."

Some winners, some losers

Some sectors have become hotter at this time. Edtech and gaming offer exciting opportunities for Khanduja. “People have time to try out new products. A lot of this behaviour might stick if the product is good," he points out.

Pankaj Makkar of Bertelsmann sees migration from offline to online businesses, which will benefit tech startups. “Digital businesses will get a leg up across sectors, wherever there is a concept of virtual buying and you don’t have to meet the sales person to experience a product."

VCs prefer capital-efficient asset-light businesses, but the shared economy will now take as big a hit as offline businesses if they require physical contact points. Mobility, for instance, will be constrained by people’s reluctance to share rides.

The travel and hospitality sectors will take the longest time to recover. But even there, impacts vary according to the nature of the business. “Domestic hospitality will come back stronger than international hospitality," says Makkar. “I’m better off taking my family in a car to a small hotel with 20 rooms than travelling to Thailand where I have to pass through international airports. From that perspective, we will see a faster rebound in the budget segment than the five-star segment which depends on foreign travellers."

The overarching theme unfolding for startups is a stronger push towards profitability. “Chasing growth with bad unit economics can really bite you when the going gets tough. The ability to dial up and dial down cash burn is important. Those are common sense business principles, but people tend to ignore them when they’re chasing large markets and trying to compete on vanity metrics," says Makkar.

“We don’t have significant exits in the country because most companies keep bleeding. They bleed because their investors want them to grow fast. So it’s kind of a vicious cycle," explains Makkar. “We now hope that good, strong, profitable companies will emerge because they’re chasing sensible growth and not crazy growth, as they value cash flow more than top line. Over time, we’ll see those companies IPOing or selling to strategic buyers. Those would be the right kind of exits which the VC market has been starved for."

Thus, digitalization and a healthier VC ecosystem are two positive outcomes that may come out of the covid situation.

Sumit Chakraberty is a consulting editor with Mint. Write to him at chakraberty@gmail.com.

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