Every cloud has a silver lining. That’s the motto most venture capital (VC) firms and startups live by.
According to the International Monetary Fund (IMF), India is one of the very few countries expected to show positive economic growth, amidst the novel coronavirus outbreak that has put the world in a “Great Lockdown” and has brought about the worst recession since the Great Depression in 1929, dwarfing the Global Financial Crisis of 2008.
Assuming that the pandemic fades in the second half of 2020, the IMF projects India’s gross domestic product (GDP) to grow by 1.9% by the end of this year which is the highest globally.
The VC and startup community in India is already preparing for the worst and hoping for the best.
While the global healthcare crisis that has infected over 18,500 people and claimed more than 600 lives in India is yet to blow over, the investors who KrASIA spoke to expect a long U-shaped recovery once things get back to normal. They predict things would gradually improve over the next year.
Some VCs believe not only Indian startups that would survive this crisis would evolve to become resilient, but new digital opportunities would also open up in a post-COVID-19 world.
The VC and startups 2.0
“These types of situations force people to make hard choices and these hard choices then make for resilient business models,” Abheek Anand, managing partner at Sequoia Capital told KrASIA. “For example, a startup can shift from an asset-heavy to an asset-light model, making it much more resilient.”
“Going through the crisis, startups will learn to identify and part ways with business clients that are not profitable and focus on things that are working, which in turn would improve quality,” Anand said.
Pranav Pai, managing partner, 3One4 Capital, feels most startups will get disciplined post the crisis.
“Having gone through a shock like this, no founder would go back to how things were before. Everyone now will have the mental model of what happens in a crisis, how difficult it can be. So every startup will have multiple scenarios—plan A, B, C, and D,” Pai told KrASIA. “They would treat cash very carefully, they would not be so generous in spending cash on marketing, ads, and discounts.”
Once we collectively come out of this crisis, Pai said, founders would rethink their discount strategy and there’d be a change in investors’ tolerance level for companies “that have no way of realizing bottom-lines and building up to at least 20% in margins.”
“Investors would start asking harder questions at the board level,” he said. “Everyone would now rethink capital allocation and expense tolerances.”
At the same time, VCs would change the way they look at startups as well as change some internal processes to adapt to the new world. Sequoia’s Anand said as the firm continues to meet founders over video calls to invest during this cycle, their diligence processes will have to evolve and change in this market.
Arpit Agarwal, principal at Blume Ventures, told KrASIA that they would be looking for companies that have a slightly long-term outlook.
“In a normal situation, you typically can’t expect the company to give you visibility on what they will be in four or five years from now. But it might make sense to now invest in companies that have a long-term tailwind horizon,” he said. “We also want to evaluate what the new world after coronavirus would need, although it is not very clear right now.”
The opportunities post-COVID-19
Ashish Taneja, a partner at New Delhi-based early-stage VC firm GrowX Ventures, believes this is an opportunity for the startups to go back to the drawing board and assess if the products and services they were planning to launch would still be relevant in the post-COVID-19 world.
“We can build strategic options early on and be prepared to take advantage of the situation as and when things get back to normal,” Taneja told KrASIA.
Tech investors also expect a pretty dramatic shift in consumer behavior who are now being forced to transition from offline to online services.
“There are some silver linings for startups in the long term. For example, it will accelerate some market changes such as the transition to digital services, and help create market opportunities that would have otherwise taken years to emerge,” said Anand.
“The crisis has forced us to conduct normal business in a digital manner–if you have to sell something or buy something or meet somebody–you have no choice but to do that online,” said Anand. “All communications and transactions are being conducted in a digital manner now. Technology companies are going to be the beneficiary of that.”
According to Taneja, this could be the beginning of a new set of solutions that would reign the next decade, just as Silicon Valley startups like Uber, Square, and Airbnb had come up and raised the first round of their capital just a few months after the global economic meltdown in 2008.
“This is a great time for entrepreneurs to think through what the new world order would be like and how they can create something of significance,” Taneja said.
There is going to be new opportunities for VCs as well.
“Investors would definitely see some good opportunities at decent valuations,” said Anil Joshi, managing partner at Unicorn India Ventures. “Investors who might have missed out on some opportunities previously, they would be able to invest in new upcoming areas at reasonable price points.”
Going forward, he said, investors would look for businesses that would be “protected from this kind of scenario because this might be the beginning of such situations where there is a virus but cure is still some time away.”
Joshi added that while science and technology would also improve and may come up with solutions for such situations much faster, there would still be uncertainty and investors would factor it in before writing cheques.
The survivors and the winners
As of now, a few tech startups, albeit a smaller set, have managed to benefit from the lockdown due to the spike in demand. However, their success is entirely dependent on how much of it they are able to maintain once the lockdown is over.
While the startups that have had zero revenue during the lockdown but are able to manage their cash runway to survive until the demand comes back would get back on their feet much quicker and firmer.
Startups in the sectors such as productivity and HR software, edtech, med-tech, online fitness and yoga, mental health, streaming, short video, and social media have seen a pick up in demand as millions of people are staying indoors to prevent the virus spread.
“If these companies are able to use this time to increase their penetration and show sustained usage even after they come out of the crisis, I think they will get more attention,” Taneja said. “However, the companies that have a momentary spike may not see long term interest.”
Unicorn India Ventures’ Joshi believes once the lockdown is lifted people would still be wary of venturing out for about six to 12 months. “But post that,” he said, “I clearly see a different world where more and more businesses would be engaged in digitization, primarily traditional businesses that have always been dependent on manual intervention.”
For instance, he said, things like end-to-end payments, orders, and shopping would either happen online or be digitally assisted.
“Startups that would be willing to align to that new change would be a winner,” he said. “Ones which would not adapt quickly will take longer to recover.”
Even as investors prepare themselves and their portfolio companies to fare the storm for the next six to 12 months, they expect things to pick up for early-stage companies first.
“In the next three to six months investment activity should pick up in early-stage including pre-Series A and Series A rounds,” GrowX Ventures’ Taneja said.
Once we know what the impact (of the crisis) is, he said, seed and early-stage startups would be truly disrupted by the next set of opportunities, Taneja added. “What we will see in late 2020 and 2021 is what will define the next decade.”