Consolidation, capital conservation, and more: startup funding trends to watch

Investment trends in the first half of 2020 — i.e. six months ended June 30 — show that startups received 14.7 percent less funding versus a year ago. Investments especially declined over April to June, according to YourStory's report on H1 funding trends, as the COVID-19 pandemic increased its stranglehold in India.

Overall funding in the first six months of 2020 fell to $4.16 billion from $4.88 billion a year ago, even as more startups got funded. Deal volume rose 3.2 percent to 392, but the average ticket size of those deals, across sectors, fell 17.2 percent to $10.6 million, which means more startups raised funding, but not as much as last year, on an average.

The startup ecosystem largely expects the effects of the coronavirus to last another year, at least, even as we adapt to a 'new normal'.

Companies exploring innovative ways to deal with COVID-19 — in whatever shape or form — could fare better than the others, while the rest may have to try harder to justify their funding ask, especially as investors look for ways to take risk off of their portfolios.

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Following are some other things startups in the 'new normal' might need to get used to, at least for the foreseeable future:

Conserve capital: This is the top priority for all startups given the very uncertain business environment due to COVID-19. The advice of investors to founders is to have a cash runway of at least 12 months, if not 18 months, to tide over the situation.

Efficient business model: 2020 is likely to see many startups fall by the wayside, as their business models will be unable to handle the crisis. Those startups having a superior business model and good operating metrics are likely to emerge stronger.

Deal flow: The deal flow is likely to remain muted throughout the year as investors have turned very cautious. It will be the small-sized deals that are likely to continue but large-sized transactions may be postponed until next year.

M&A to increase: The startup ecosystem is expected to see more mergers and acquisitions, with companies looking to combine their strengths to battle the business downturn and seek new opportunities.

Virtual collaboration: Given the remote working environment and the lack of full mobility, startups are now focused on virtual collaboration platforms, and solutions are likely to get better traction. However, a completely virtual environment is ruled out, with a hybrid model with physical aspects of working more likely to be adopted.

Top cities: Bengaluru, Delhi-NCR, and Mumbai are likely to dominate the startup ecosystem, both in terms of new companies emerging and the infusion of funds. Other locations will also receive investor interest but not as much as the top-tier destinations.

Edtech: With students going online, edtech has emerged as the hottest segment among startups, with revenues showing rapid growth and many catching investor interest. This trend is likely to continue for the rest of the year, but they could face stiff competition from educational institutions that are expected to up their online quotient.

Ecommerce: This segment seems to be in the sweet spot as it is essential to safe and contactless delivery of goods in the COVID-19 environment. The grocery delivery element might get a big boost this year.

Mobility: The lack of people’s movement has deeply impacted the mobility segment, but this could give rise to micro-mobility as consumers look to safer alternatives instead of public transport.

Agritech: This sector has seen advances in terms of deployment of technology in areas such as farm inputs, supply chain networks, and market linkages. This is expected to get a further boost during the year as the demand for quality agricultural produce such as grains, fruits, and vegetables is expected to rise. Also, the higher demand for online groceries in the COVID-19 environment will prove to be a boost for agritech startups.