Seed and early-stage funding in Indian startups set to revive as new business opportunities emerge

With the COVID-19 vaccines being released in many countries across the world, there has been a pronounced sigh of relief about the status of the global pandemic.

The good news is that the Indian economy is rebounding at a faster than expected pace, as people and businesses have found ways to adapt and innovate. Even though the second quarter of this financial year saw the GDP contract again, there are indeed reasons to smile.

India has dodged the much-feared double-digit contraction and the contraction itself appears to be slowing its pace. And the road to a complete recovery, though paved with struggles, has increasingly bright lights at the end of the tunnel.

In such a backdrop, where do Indian startups stand? An industry that relies heavily on venture funds and angel funds is witnessing a change in the landscape of fundraising.

The changing landscape

The past decade has seen a great deal of growth when it comes to venture capital firms and investors. The years 2018 and 2019 particularly stood out, but the turn of events in 2020 has led to a massive shift. To begin with, venture capital investors and angel investors were cautious about putting in dollars into emerging startups when the risks were significantly higher during the uncertain times.

And the uncertainty was multidimensional - how long the pandemic is going to last? When will consumer demand rise (and that itself is tied to economic recovery)? How will the nature of operations change? As a consequence, many sectors saw a slump in funding, with travel and hospitality taking the brunt of the blow.

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The break in the clouds

“A downturn may be the most attractive time to open new discussions, make new investments, structure new transactions, or start a new venture fund.” – Forbes.com

COVID-19 has been a before and after moment in the history of digital transformation and resulted in a huge shift in consumer behaviour and an economic reset. History has enough data points to prove that downturns have seen the rise of some of the most successful companies (Airbnb, Netflix, Microsoft, and many others).

The pandemic has also ushered in a new phase of heightened entrepreneurial activity in the country, and the nature of changes has resulted in the creation of new opportunities. As everything goes online, startups working on new technologies to enable this transition have emerged as promising ventures. A success story here is that of the edtech industry.

As education goes digital, students have been looking towards online learning as a necessary alternative to traditional education. Sectors like healthtech and supply chain demanded quick innovation to meet the evolving needs, and startups rose to the occasion and created new models overnight.

One prominent example is that of Mylab Discovery Solutions, who were the first domestic firm to manufacture COVID-19 test kits.

The startup landscape in Tier II and Tier III cities saw some interesting developments. While seed and early-stage investment has seen a year-over-year decline in the past few months, budding entrepreneurs have seized the opportunity to come up with novel solutions for local needs.

Internet penetration to small towns has been an important factor driving the emerging startups. Investment levels, therefore, are expected to return to pre-COVID levels and even go beyond in 2021.

Where next?

The big mindset reset brought on by the pandemic has changed the perception about investing in early stage startups, and now more than ever we are seeing interests from HNIs and UHNIs to consider angel investments as a serious asset class.

There is a massive opportunity that the Indian angel investors have started to tap, as startups look for strategic investors in the early rounds who can provide advice and guidance along with financial support.

There is heightened activity through direct cheques, and even secondary transactions as Indian investors are becoming more aware of the advantages of investing in a company which they can actually guide and mentor towards success, unlike the share market where individuals have no control over the fortunes of their portfolio.

Global trends like the exceptional financial support provided by VCs to their portfolio companies to keep afloat and help them pivot fast, and the super successful IPOs of Doordash, Burger King, and Airbnb have also provided fresh perspectives to new investors to be part of these exciting journeys.

To conclude, we can say that in a fast-changing world that continues to press more challenges, the landscape for venture capital investors, angel investors, and Indian startups may be challenging but still full of opportunities.

With the vaccine now ready, India has been gearing up for what is going to be the world’s biggest immunisation programme. Therefore, perhaps it is safe to say that the worst is behind us and the future looks exciting with a never before seen rise of Indian startups.