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Top takeaways from VCs in India from 2020 | KrASIA Year in Review

Written by Moulishree Srivastava Published on     7 mins read

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From the two-month-long COVID-19 lockdown to the economic slump to the Chinese funding crunch and app ban, 2020 has been a roller coaster year for entrepreneurs and investors alike.

Earlier this year, India, the second-most-populous country in the world, enforced a two-month-long national lockdown starting from late March to prevent the COVID-19 spread. During the period, anxiety took firm hold of the startup and investor community.

Anirudh Damani, managing partner at Mumbai-headquartered VC firm Artha Venture Fund, received calls from many of his investor friends amidst the lockdown. They told him that there would be no more writing of new checks till at least the December quarter.

In the ensuing few months post the lockdown, Damani, who has backed startups like lending firm Lenden Club and space tech startup Agnikul, like all the other VCs, got busy making sure that his portfolio startups have long enough runways to survive the sudden crisis.

With investors keeping their money aside for the companies they were already backing, the new funding deals nose-dived for about four months, from April to July. But fortunately, it didn’t take too long for VCs to change their mind. As the pandemic forced millions of Indians to adopt digital services, be it for grocery, medicines, education, or bringing their own businesses online, many investors got excited and began writing checks for startups that were catering to these needs and seeing a sudden spike in user numbers.

“We could see green shoots from August- September,” Damani told KrASIA.

The investment activity eventually picked up in the third quarter of the year, when VCs poured in a total of USD 2.79 billion in the world’s third-largest startup ecosystem.

In hindsight, while COVID-19 has posed the biggest ever challenge to India’s startup ecosystem since its inception, it also brought upon opportunities in areas like edtech, health tech, digital entertainment, and online grocery. In fact, the last eight months have revamped the country’s startup ecosystem and changed the way VCs look at it.

Read this: India and Southeast Asia will be one market with 2 billion customers: Lightspeed India Partners

There is no doubt that the economic adversity that India is going through due to the healthcare pandemic as the second-most-populous country with nine million COVID-19 cases, has trickled down into the startup and internet sector, which was expected to contribute 20% of its GDP in five years as compared to the current seven to eight percent.

What made 2020 even more of a roller coaster ride for entrepreneurs and investors in the country was the series of events that happened during the pandemic. The list includes the India-China border clash that gave rise to anti-China sentiments, the Chinese app ban and TikTok’s exit, and the new FDI regulations that made Chinese funding scarce for local startups, among other things.

As the year draws to an end, we at KrASIA sifted through the peaks and the troughs of India’s startup ecosystem and gleaned the insights from various stakeholders for our Year in Review series for the Indian market. For the first part of this series, we spoke to investors to understand their top takeaways from 2020.

Back to the basics

Till about the beginning of this year, a majority of the startups in the country prioritized growth over positive unit economics. Translation: they were burning more money to get one customer than what they were earning from her.

Even though late last year, major global VC firms began re-aligning their focus towards profitability, shocked by the colossal valuation collapse of SoftBank-backed co-working firm WeWork, it didn’t exactly change the ways of local startups that primarily chased growth.

However, the healthcare pandemic brought the larger startup ecosystem down on its knees and forced the companies to re-look at how they conducted business.

“After Covid-19, a majority of Indian entrepreneurs are more focused on driving sustainable growth with reduced cash burn and better unit economics, compared to last year when a majority were biased toward growth over profitability,” Ashish Sharma, CEO, InnoVen Capital told KrASIA. However for “tailwinds sectors” like edtech, gaming, and e-commerce, the bias continues to be towards growth as there is enough investor interest and capital available, he added.

Anil Joshi, managing partner at Unicorn India Ventures, feels the pandemic has made everyone cautious about the cash flows.

“Earlier when we talked to founders about cash flows, there were blockages in their thought process,” he said. “Now the conversation is all about profitability.”

Investors and entrepreneurs, both are looking to maximize the impact of every rupee they are spending while focusing on collaboration and productivity, aside from unit economics and profitability, believes Ashish Taneja, partner at early-stage VC firm GrowX Ventures.

The VCs KrASIA spoke to said a lot of their portfolio companies have already started turning cash-flow positive as they reduced expenses dramatically and tapped diverse revenue streams.

“This year was a reminder that positive unit economics always trumps scale. Startups should not be scaling unless they have positive unit economics,” said Damani.

“They are now coming back to the basics that the business is about making profits and not about just growing,” he added.

The flip-flop

No one could have envisaged edtech would become the most funded sector this year, even though it started the year on a high note. After all, the edtech sector had been an underdog for the better part of the decade. The pandemic brought the segment to the limelight as millions of students struggled to keep up with their studies, with schools and colleges shut for over half a year.

According to InnoVen’s Sharma, edtech startups raked in almost one-third of the fundings this year, which stood at about USD 7 billion by September.

Sectors like gaming and health tech that were largely ignored by mainstream investors for the last few years began attracting more attention from them as millions of home-stuck Indians flocked to online games and medtech platforms. There was also the sudden rise of homegrown short video apps after the abrupt exit of Chinese giant TikTok in late June. A bunch of TikTok alternatives landed early stage checks from investors to expand and diversify their offerings.

Similarly, B2B startups enabling people to work from home or helping offline businesses to come online hogged the limelight at the peak of the pandemic. Meanwhile, startups in the sectors that were previously expected to be hot this year like mobility, social commerce, or lending, lost their sheen as they struggled to survive the crisis.

“In many ways, the red hot sectors have become cold, and the ice-cold sectors have become hot,” said Damani. “Earlier people didn’t want to invest in sectors such as edtech and health tech because it required massive changes in behavior and were very difficult to capitalize.”

The year 2020 accelerated the digital adoption of internet services, which tweaked the investment thesis of many VCs as they made bets on startups looking to create solutions for the post-pandemic world.

Startup

The changing playbook

When the healthcare crisis struck and nationwide lockdown impaired a majority of businesses, the VCs tightened their purse strings as they rushed to rescue their affected portfolios. A couple of months after the Indian government lifted the lockdown in June, the funding activity began picking up, but only in a few selected sectors that were benefited by the pandemic.

Furthermore, as SoftBank held itself back from writing large checks after the WeWork collapse eroded its profits and Chinese funding dried up due to the new FDI regulations, entrepreneurs had to start searching for new sources of capital.

“Even though funding activity is coming back, it will take time for it to reach normalcy. Along the way, startups have realized that the only way to survive this period is by earning money through customers,” said Unicorn Ventures’ Joshi. “The pandemic has made founders creative. A lot of them have come out with solutions themselves to generate new revenue streams.”

For instance, some startups have tweaked their business models to offer new services, more suited to serve their customers in the post-pandemic world. Others have diversified their business by venturing into segments that have been experiencing tailwinds to ensure that they could get by, till the demand for their core product comes back.

GrowX Taneja’s said Indian startups’ focus is shifting towards building resilient businesses to withstand future crises by providing customer base alternative service lines.

However, these strategies have worked better for startups in the early stages. Growth and late-stage startups have also had to look for new backers including venture debt firms, corporate VCs, private equity (PE) players to sustain operations and carry on with their growth plans.

“In the past, a significant amount of late-stage rounds were led by SoftBank as well as Chinese strategic players,” said InnoVen’s Sharma. “Founders are now looking more actively at other sources of capital like PEs, hedge funds, and strategic investors to lead large rounds.”

Although PE funds like high growth, they also look at profitability. Thus, many investors feel, these startups would need a different playbook than what they have been following so far.

Agility and adaptability

Given that the pandemic was the first major crisis that the Indian startup ecosystem faced since its inception, investors who KrASIA spoke to, share the consensus that the majority of startup founders showed resilience and perseverance, as they led their companies out of the slump.

What has helped them navigate through the crisis is their agility and adaptability, they said.

As founders learned to do more with less, it changed how they think about their business, said Akshay Bhushan, partner at Lightspeed India. A lot of them adapted quickly to the new normal, working out of their homes, and eyeing solutions that could cater to the needs of users in the new, post-COVID-19 world.

“This has been a year where every stakeholder in the ecosystem has had to show this ability to be agile to navigate the situation successfully,” Bhushan told KrASIA in a recent interview. “A lot of founders have been agile, whether it is switching to remote working or getting and accepting investments from VCs without ever having met them in person.”

Overall, investors believe that 2020 has taught founders how to adapt to the fast-changing world amidst uncertain times, and the experiential knowledge that they have gained would help them in the long run.

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