One year of lockdown: What the COVID-19 pandemic taught the Indian investor ecosystem

The COVID-19 pandemic taught investors to be cautious and diversify their portfolio while supporting their existing portfolio companies. Investors across the Indian startup ecosystem share their learnings from 2020.
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The havoc created by the COVID-19 pandemic in 2020 was expected to severely hit the Indian startup ecosystem with the consumer mindset undergoing a drastic shift across industries.

In fact, a NASSCOMsurvey in May, which was conducted to study the impact of COVID-19 on Indian startups, found that 70 percent of startups have less than three months of cash runway.

However, in these turbulent times, the Indian investor ecosystem emerged as a ray of hope.

According to YourStory Research, Indian startups raised $9.4 billion across 881 deals from around 1,476 active investors in the ecosystem. While the funding amount reduced by almost 17 percent in comparison to 2019, the number of deals received a setback of around two percent only.

Although investors adopted a cautious approach, they continued to diversify their portfolio and support existing portfolio companies with small ticket-size funding and follow-on rounds.

As the Indian startup ecosystem completes one year of the lockdown, we reached out to investors to know what they learnt during the pandemic and how they are laying the road ahead in 2021.

Here are edited excerpts.

Bhaskar Majumdar, Managing Partner, Unicorn India Ventures

At a philosophical level, the key learning is that there are forces always at play that are beyond our control. We worked closely with our portfolio startups that faced COVID-19 induced business challenges like order cancellation, cash flow crunch impacting working capital. 2020 was a year of pivots and learning to manage cash flows better. Profitability being the centrepiece. We announced seven new investments during COVID-19 but in a cautious manner.

The year 2021 will see most of the funding go to only high performing startups that are market leaders in their addressable categories or defining newer arenas.

Padmaja Ruparel, Co-founder, Indian Angel Network, and Founding Partner, IAN Fund

2020 was a tough year but also a year for the tough to get going. Many startups pivoted and many others leveraged to build stronger businesses – with a focus on the top line and the bottom line. Focus on basic needs like healthcare, education, finance, and food/agri was high, and this will continue in 2021 but with technology driving businesses with either tech products/tech leveraged.

Ashish Bhatia, Founder, India AcceleratorIn 2020, because of COVID-19, we have redefined our model to completely virtual and strategised our interventions accordingly. The year 2020 has undoubtedly laid down exacting standards for startups to emerge amid the market uncertainties. The radical shift in digital adoption is set and will continue to drive different sectors such as education, healthcare, and commerce. Also, things have completely disrupted the way we work; it has made us accept that technology is the company’s best asset, especially in the corporate world. I have acquired that the change is constant and no matter how difficult the time is, we need to try and move on with the current scenario.

Amid all the disruption and uncertainty, we should take time to contemplate how you can differentiate yourself from the crowd and explore opportunity out of it.

Srikrishna Ramamoorthy, Partner, Unitus VenturesFor entrepreneurs and investors, the pandemic has only reinforced the fact that the ability to react quickly to fast-changing situations is key. One needs to always have a Plan B and beyond. More importantly, it requires a collaborative approach and not a prescriptive one for a founder-investor relationship to succeed, more so in these times.

The pandemic has been a real test for entrepreneurs. Founders have had to adapt like never before, turn adversity into an advantage and create the best possible outcomes. More importantly, this has brought to the front the value of creating and investing in great teams.

Finally, I think one learning for all of us is that we have to invest in our mental health.

Ankur Bansal, Executive Director, BlackSoilCapital

From an investor's perspective, On one side COVID-19 led disruptions re-emphasised on basics of investing like portfolio diversification, contingency planning, knowing the investee company in and out, adequate pre-investment diligence, and efficient monitoring of portfolio companies, while on the other side fast-paced digitisation, being agile, remotely closing deals, cross-functional working of employees absolving role constraints, etc., are some of the new learnings which otherwise would have taken years to be implemented.

Investment strategy focus going forward is to be on the lookout for companies that could use tech to quickly emerge category leaders backed by sustainable margins and possibly serial entrepreneurs/ founders with deep domain expertise.

Deepak Gupta, Founding Partner, WEH Ventures

Every tail event such as the pandemic, the 2008 crisis, the 2000 NASDAQ crash hold lessons for investors. At the same time, each event is unique and hasty generalisations are not to be drawn.

The pandemic has probably taken the Internet from a "nice to have" to a core utility for a large proportion of the population and businesses.

In some ways transformative like the SARS wave of the past decade. This has strengthened conviction for investors and opened up more sectors for investment — industrial, construction, agriculture. One other lesson is also to not put too many eggs in one basket — e.g. the mobility sector is one where VCs tool multiple bets.

Anirudh A Damani, Managing Partner, Artha Venture Fund (AVF)

The pandemic prompted the investor community to re-focus on the fundamentals. The investors' focus shifted, i.e., investors now want to see customer fund operations and their investments go towards funding growth – real growth. Founders learned that cash burns should be made in short sprints and achieve pre-agreed strategic goals. Once the company achieves its outcome, it should revert to cash profitability. Therefore, business models that survived on investor handouts were questioned – and rightly so.

 

The profound economic impact of the pandemic prompted the government to (finally) loosen their purse strings. They utilised this golden opportunity to reform into various sectors such as agri-tech, space tech, digital payments, financial services, etc.

It created an opportunity for intelligent founders to build into the sectors that the government was opening and capitalise on the gold rush.

Ankur Mittal, Co-founder, Inflection Point VenturesWe counselled our investee companies to be agile and ready to pivot if they operated in industries hit hardest by the pandemic. We created an expert panel (handpicked from our investor pool) who helped startups cut costs, pivot, and even contribute to our country’s fight against coronavirus. Deal flow and exit talks continued uninterrupted because IPV was set up as a digital-first organisation. During challenging times, being inactive is the worst choice.

The strategy was clear. It was the best time to invest as we were investing with the knowledge of pandemic and its effects.

We identified areas that can show accelerated growth under the new circumstances and by funding the startups at that time, we gave them a clear runway of 12-18 months to build their businesses in a cost-efficient environment at reasonable valuations.

Dr Apoorva Ranjan Sharma, Co-founder and Managing Director, 9Unicorns

The pandemic was a blessing in disguise for most of the VCs globally. The most important lesson learnt was that every crisis brings an opportunity with it and one should be agile enough to identify the same.

As a VC or Angel investor, it becomes quite overwhelming to see your portfolio companies struggling and it becomes a daunting task to provide support to each one of them. The pandemic has taught us to be resilient and optimistic even during the darkest hour.

Anuj Golecha, Co-founder, Venture CatalystsWhile 2020 has been a whirlwind of a year, the investor community has remained less impacted. But there have been certain learnings too.

  • First, VCs have started communicating more often with their portfolio companies to understand the business and how it could be pivoted during a crisis.
  • Second, never bet on one or two sectors but have a diversified portfolio.
  • Third, technology can be disruptive and can create a level playing field if used effectively.

Manish Singhal, Founding Partner of Pi Ventures

The pandemic has been quite an eye-opener for me. Earlier at least for me meeting in person with someone was so critical before making long term decisions – be it either investments or onboarding a new team member. That has changed dramatically — we have not only onboarded three new team members in the last year but also made a couple of investment calls.

From a technology perspective, we are seeing multiple use cases coming through, especially on the automation side. Our research shows that the adoption of disruptive AI across the globe has gone up by two to three years because of the pandemic — in fact, we are calling it a second inflexion point for modern age AI.

Ninad Karpe, Partner at 100X.VCThe pandemic has rekindled one skill, which was probably dormant in most of us – resilience. This encapsulates all the skills required to survive, pivot, relearn, reskill, and grow rapidly.

The new normal is to build business models which are future-proof and can grow in all situations – in an upsurge of economic activity and also in hostile, uncertain conditions.

Devang Mehta, Partner at Anthill Ventures

Ensure that one's portfolio is ready for even the most unexpected contingencies. Safer investments will continue to be in areas like healthcare where the demand is largely inelastic with the state of the economy.

Further, we will see some movement towards 'first principles of using funding proceeds more cautiously and to strive for profitability.

Ratna Mehta, Executive Vice President, Wadhwani Catalyst Fund at Wadhwani Foundation

Adversity is the best learning ground. This would be most relevant for startups, who have experienced adverse heat during the pandemic. Some of the key learnings from this period for startups are:

- Cash is King — using cash wisely is extremely important to survive any crisis

- Innovation is crucial — being adaptive, modifying offerings, agility in execution, and picking up cues from changes in customer journey and lifestyle go a long way in building a resilient business model.

- Taking care of your people and customers during tough times is critical towards building trust and loyalty, which are priceless for startups.

Utkarsh Sinha, Managing Director at Bexley Advisors

The year has shown both the strength and the weakness in the startup funding ecosystem. While we saw tremendous activity in late-stage deals, with moderate valuation impacts, Series B and earlier rounds took a hit with most investors displaying more caution than usual.

It was a surprisingly good year for known-entity funds that were raising their second or later round of LP capital; although first-time funds were hit hard by their inability to travel and network to raise.

Rohini Prakash, CEO, Tomorrow Capital

What we have seen in the pandemic has been a wave of digital adoption in consumption across categories, with a bunch of B2C brands emerging because of an increasing willingness to buy purely online. Even in categories like real estate and home interiors, which would traditionally be completely offline, there has been a movement towards greater digital adoption in the purchase process.

Going forward, while there is a lot of talk around digitally native businesses, our belief is that many of these will move back to a hybrid model which is more digitally enabled, the right mix of offline and online.

Shanti Mohan, CEO and Co-founder, LetsVenture

The pandemic has indeed been a roller coaster and emotional ride for the entire founder community including me. The pandemic has indeed been a learning curve for all of us. However, the best part was that the entire ecosystem stood by each other and the role of peer relationships has helped entrepreneurs to get through the current crises.

While the roller coaster ride is yet to stay, with the Aatmanirbhar sentiments echoing strongly in India, the pandemic opened more avenues for startups. I am personally looking forward is meeting founders having strong business fundamentals, working towards bridging the gap for the unique demands of the huge Indian market in the future.

What is exciting to see is the ESOP pool gaining momentum with time, with founders focusing on retaining and maintaining talent within the organisation which has helped platforms such as MyStartup Equity garner more than 200+ customers.

Sunitha Ramaswamy, President, Early Stage, LetsVenture

2020 was indeed a great run for LetsVenture as a platform where we saw the closure of 105 deals which was a significant growth of 2X from 2019. This was indeed a significant indicator that investor sentiments were still strong in India and they were still keen to invest in early and growth-stage start up’s across sectors such as edtech, consumer tech, healthtech, ecommerce, as well as enterprise SaaS to name a few.

While we saw 45 percent new angel investors coming on board, who guided and mentored founders, helped our portfolio companies to tide over the initial shock of the pandemic.

From a founder perspective, the lockdown and economic slowdown was an eye-opener for startups to better plan their cash runaways and create a diverse pool of capital. Hence, we at LetsVenture are working towards building a full-stack private marketplace that will help in facilitating fundraising for startups in the next few months.

Edited by Saheli Sen Gupta

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