‘Swallow your pride, be real, be patient’: Growth equity dealmaker’s advice to startups on funding

YourStory Research's report on funding trends in the Indian startup ecosystem in H1 2020 revealed that the overall funding in the first six months of 2020 fell 14.7 percent to $4.16 billion from a year ago, while deal volume rose 3.2 percent to 392. The average ticket size of those deals, across sectors, fell 17.2 percent to $10.6 million, the report showed.

Even though more startups got funded in the first six months of 2020, the deal sizes shrank, pointing to the fact that investors put in less money in more startups to spread their risks.

“We are dealing with very very uncertain times. This time, the funds available is almost one-fourth of the funds available last year. These are the times in which investor attention is more binary than ever,” Kashyap A Chanchani, Managing Partner, The RainMaker Group (TRMG) told YourStory Media Founder and CEO Shradha Sharma during a conversation on ‘fundraising for startups in the times of coronavirus.’

In a LinkedIn post, Kashyap mentioned that growth funding for the rest of 2020 was expected to fall to $2.0-2.5 billion across 40-50 deals, compared to about $10 billion across 150-200 growth deals witnessed in 2019.

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TRMG, which has made a name for itself as one of India’s top growth equity dealmakers in just four years, recently released a report named “Embrace Your Stereotype: The Definitive Growth Equity Guide for the Rest of 2020,” in which it attempts to detail what is likely to play out in the venture-backed growth equity world over the coming months.

“We spoke to dozens of global and domestic investors active in India’s growth-stage ecosystem — from early-stage, growth funds, to mega funds. What we find out is that while India-based investors will start participating actively in growth deals ($15-100 million rounds) within three months from now; overseas investors, who have really fuelled the growth capital boom of 2019, will start becoming active within six months,” Kashyap said.

Watch the video here:

Are you ‘Destiny’s Child’

In its report, the company divided the 200-odd companies that would be candidates for growth equity in India’s startup ecosystem into four archetypes: The Destiny’s Child, The Survivor, The Coin-toss Wager, and the Second Life Warrior.

“We believe that the first two archetypes (Destiny’s Child, Survivor) would account for 10 percent and 20 percent of the companies respectively and these would corner around 80 percent of the $2-2.5 billion of the growth funding that would happen over the next 12 months," Kashyap added.

According to Kashyap, if you're ‘Destiny's Child’ there is a high likelihood that you are in edtech, digital media/gaming, delivery/ groceries, or the global SaaS business.

“You have a runway that extends to 18 months or more without compromising your growth plans. The COVID-19 crisis has fundamentally and permanently accelerated the gravitation to your offering (or) has left you completely untouched. Your revenue is still going up, and you will be at 2X the scale or more in FY21 over FY20.”

If you're a ‘Survivor’, there is a high likelihood that you are in the vertical commerce, vertical classifieds, logistics/domestic SaaS business, or operate in buckets of fintech that have weathered the storm, said Kashyap. For companies that fall under this category, FY21 revenue would equal or trump their FY20 revenue, despite the lockdown and slow ramp-up, he added. 

“If you’re a stakeholder in Destiny's Child, you can celebrate; if you have a Survivor on your plate, you can breathe easy; but if you run a Coin Toss or Second Life business, the time to action plan B and C starts now,” according to the report.

The report also included that private equity and sovereign wealth funds would be the most active source of fresh capital, besides existing investors for this period. This would also mean that most of the action may remain concentrated in companies that are larger or have ‘more mature P&Ls.'

While 2019 saw 35-40 rounds of $100 million or more, mega rounds would come down to less than 10 in the coming 12 months, and many of them would be conditional on certain milestones/consolidation or secondary purchases at a significant discount, according to Kashyap. 

Advice to entrepreneurs

On how entrepreneurs can navigate this difficult time, Kashyap said they should be as conservative as possible “till the money hits your bank account(s).” 

He elaborated, “It’s not your money, so be very very careful, don’t make commitments in terms of hiring and in terms of expansion until the money hits your bank account. In such times, you can’t think two steps ahead in an optimistic manner anymore.” 

The conversation while pitching to prospective investors is now focussed on “cash flow only,” instead of discussions around unit economics, contribution margin, and EBITDA (earnings before interest, tax, depreciation and amortisation) etc., he pointed out.

“This time founders have to be more prepared to answer difficult questions related to the predictability of the business or what they will do in case the things go wrong because investors are also asking the similar questions to their own portfolio companies as well.”

He also advised entrepreneurs to not make forward-looking plans which could be very aggressive in terms of fundraising. “Don't take money for granted until it actually hits your bank account because this time the deals are not straight. These are the signs of the time and this time, swallow your pride, be real, be patient, and move ahead.”