Entrepreneurs must be prepared for longer funding cycles: Ashish Sharma, InnoVen Capital

InnoVen Capital was established in 2008 as a venture debt platform focused on investments in startups across sectors. 

With offices in India, China, and Singapore, it has made 14 investments in this year and has raised $200 million from its shareholders — Singapore government’s investment firm Temasek and United Overseas Bank. Its portfolio companies include MobiKwik, Yatra, Pepperfry, NestAway, Oyo Rooms, Treebo, Shopclues, Zoomcar, and Ather Energy. 

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In conversation with YourStory, Ashish Sharma, CEO, InnoVen Capital, speaks about the pressing topic of the times: the impact of coronavirus and what startups need to do during an unprecedented crisis like this. 

Ashish was the President and CEO, GE Capital, until he joined InnoVen In October 2017. He has served on various industry bodies such as CII National Banking Committee and CII National Committee on NBFCs.

He speaks about how the impact of the pandemic on investments and how startups can revive in a post-coronavirus world.

Edited excerpts from the interview:

YourStory (YS): What has been the impact of COVID-19 on startups?

Ashish Sharma (AS): Like all companies, startups are also facing challenges on the demand and supply side. Moreover, there is a unique challenge on account of funding market dislocation. Startups typically plan their finances around a 18-24 month funding cycle.

Unless one was lucky to have closed a funding round in the last four to six months or is part of a sector that is benefiting from the “new normal”, most other startups face liquidity issues till the situation normalises. 

However, I am impressed by how quickly startups have moved to execute on things that are in their control, be it scenario planning, business model tweaks, or cost reduction to extend their runway.

YS: Do you see a change in debt capital post COVID-19?

AS: The venture debt industry is a derivative of the overall venture ecosystem and has grown multifold with it. Venture debt is a cyclical business, and there are up-cycles and down-cycles as we saw during the dotcom bubble (2000-2002) and the global financial crisis (2008-2010). 

We are in a down-cycle now, so I don’t expect the market to grow this year. But I am long-term bullish on the prospects of the venture industry and venture debt.

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YS: What will it take for startups to revive?

AS: Any revival is ultimately dependent on demand coming back, which can only happen when people start feeling safe to resume their normal routines. The government deserves credit for taking strong early measures but the COVID curve is still rising and we have a few tough months ahead of us. 

A slowing economy means higher unemployment and weakening of consumer sentiment, which manifests in lower demand, particularly for “non-essential” categories. It’s clear that recovery will take some time; most companies are being prudent and planning for a gradual recovery over the next six to 12 months. 

YS: What is the impact on investment for early-stage startups? And how will that impact their growth? 

AS: Smart entrepreneurs who build insight-driven models addressing large market opportunities will always be able to raise capital. However, seed funding has slowed down, with angel investors becoming more risk-averse.

Over the last few years, many HNIs had started dabbling in angel investing and it’s possible that some of them may not come back to the market in a hurry. 

On the other hand, I am quite encouraged by the strong level of activity in the institutional early-stage (pre-Series A/Series A) funding market. There is a lot of dry powder with early-stage investors and most are actively scouting for opportunities. 

There will obviously be more interest in sectors that are going to benefit from the “new normal”. Sectors with long-term challenges will find it much harder to raise external capital. 

Entrepreneurs have to be prepared for longer funding cycles, as investors don’t have the benefit of face-to-face meetings and traditional due diligence.

With less external capital, there will be an increased bias towards profitability over growth. We conduct an annual survey of 100+ founders at the beginning of each year and 79 percent of founders ranked growth over profitability, which is what one would expect in a strong funding environment such as what we saw over the last three years. 

There were some cases of companies growing too fast without achieving a solid product-market fit and there were instances where processes couldn’t keep pace with growth. This will now change; you will hear a lot more about words like sustainable growth, margins, and unit economics. 

YS: What core sectors have been impacted and what will their exit strategy be? 

AS: While most companies are adversely impacted, some sectors are seeing tailwinds - edtech, hyperlocal grocery delivery, gaming, healthtech, content, and OTT to name a few. This could very well be their moment and give them the same kind of impetus that payment companies got with demonetisation.

Most companies are expecting a gradual recovery over the next six to nine months, but there are some sectors that will face medium to long-term challenges driven by significant shifts in customer behaviour. Travel, hospitality, home services, student housing, mobility, and fintech NBFCs are more adversely impacted. Consumer discretionary categories, particularly those with large off-line distribution, will also see challenges in the medium term.

Exit activity will slow down over the next 12-18 months. Some late-stage companies that were eyeing an IPO over the next year or two will have to defer plans. We will see most exits through M&A/buyouts and some secondary transactions. Several old funds are at the end of their life cycle and will be keen to pursue secondary sales to PE players or secondary focused funds. 

YS: What is your view of the Indian startup ecosystem?

AS: Despite the near-term challenges, I remain optimistic about the long-term prospects of the venture ecosystem. Startups touch hundreds of millions of consumers every day, whether it be how one shops, eats, commutes, gains skills, pays, and many more aspects of everyday life.

If anything, the “new normal” will only accelerate customer adoption of new-age business models and the pace of innovation will go up. In my mind, startups will be on the forefront to bring about that change.

YS: Are there some shifts that startups will need to consider in their business models? What will those be? 

AS: It depends on the sector. Every business needs to really gain deeper insights on how customer behaviour will change and what it means for their business model. Some general themes are applicable to all- “less touch” models, higher tech enablement, more online v/s offline, increased “safe” positioning etc.

YS: What is your advice for startups at this time?

AS: There is a wealth of advice that the investor community has shared with startups and most companies have benefited from that. The few things I would like to highlight are:

• Gain a better understanding of changes in customer behaviour and make tweaks to existing business models or build new models to address these. In some industries, COVID-19 has levelled the playing field, which means that companies that are nimble and innovative can gain market share from incumbents.
• Hope for the best but prepare for the worst. Contingency plans need to assume that demand will take a long time to return to pre-COVID-19 levels. This is good time to re-calibrate costs, let go of activities/projects that are not core, build more cost discipline, and also raise some capital if you can even if it’s not on the most favourable terms.
• Over-communicate with the team to ensure that employees remain engaged and focused on the long-term vision despite the challenges. 

(Edited by Teja Lele Desai)