Venture capitalists are slowly returning to the startup world. The doom and gloom following COVID-19 is giving way to cautious optimism.
Investors are now writing big cheques, making big bets and taking risks, something that was expected to take much longer.
Content startups like Dailyhunt and ShareChat, fantasy gaming platform Dream11, skincare brand WOW Skin Sciences, and meat delivery startup Licious are companies where deal discussions have heated up.
“Select startups today are actually closing rounds much faster. While a deal negotiation would have taken even a year earlier, we are seeing terms close in less than a month now. This is an opportunity window for the market leaders in these recovery segments to leap forward much faster than they expected,” says Pranav Pai, founding partner at 3one4 Capital, an early-stage fund.
The worst is over
When the pandemic hit India, investors hit the panic button- pulling out of nearly-done deals, postponing their own fundraising, having tough discussions on layoffs with no revenue for the foreseeable future, and bracing for smaller companies to shut down or sell out.
Now, even other legacy sectors, ones hit by the pandemic and benefiting from it but not restricted to food-delivery, logistics, online content, software-as-a-service (Saas) and consumer brands, are also benefiting.
“Signals show that the early excitement is returning. The worst of the correction is past us and there is a growing sentiment of relief. At least there is not as much unbounded uncertainty on recovery estimates and paths forward,” says Pai.
The only significant change is that no major venture fund will back a purely offline-based startup, or even one largely reliant on offline sales. As investors chase the consumer internet theme, this trend was arguably closing in anyway.
Further, many internet subsectors have actually gained from the lockdown. As people stay at home for record periods of time, online services such as grocery delivery, video-based commerce and ordering online across sectors is seeing more first-time users.
India’s e-commerce is set to grow faster than expected -- at a compounded annual growth rate of 19.6 percent, according to GlobalData, a London-based data analytics firm. This would give the Indian e-commerce sector a market size of Rs 7 trillion by 2023. And startups are gaining from this.
The shift in sentiment is also important because in the startup space, a lot is determined by expectations and outlooks, than on-ground performance or numbers, compared to other sectors, and that early- stage investors tend to take a long-term view.
“Early-stage sentiment, especially, is strong now. April was the only month where we were really worried. We discussed and realised that we are investing with a seven-year horizon. Now, if I take that view, then COVID, no matter how bad, should be a blip in the larger scheme,” says Rutvik Doshi, managing director at Inventus Capital India, an early-stage investor.
Edtech still a big draw
In March and April, at the height of India’s lockdown, online education, healthcare and gaming startups were the direct beneficiaries.
Of these sectors, edtech is still the easiest word to land a term sheet from an investor. Edtech startups have raised a record $1.8 billion in capital this year, according to data from Venture Intelligence.
Of this, online learning firm Byju’s alone has raised a billion dollars, most recently a $500 million in a round led by technology-focused fund Silver Lake, valuing it at $10.8 billion
This is out of the $2.9 billion all startups combined have raised this year, including software startup Postman, food-delivery firm Zomato and fitness startup Cure.fit
Not everyone gains
Even as the funding environment becomes positive, not every startup will gain equally. Market leaders, companies in new sectors, and those backed by top tier investors will see funding gravitate towards them.
“Investor sentiment is strong now, and capital is more cheaply available than ever before for both public and private markets. However, we see more capital gravitating towards leaders with strong momentum,” says Karan Sharma, co-head and executive director of technology investment banking at Avendus.
“Globally, both public markets and private markets have recovered in the last few months. Foreign funds, which sometimes drive large cheques and valuations, are also back,” he added.
India exposure of foreign funds increasing
Indian startups have been reliant on foreign capital, and many investors who don't have an India office fly in and fly out to cut cheques. At the height of lockdown, many thought these investors would be the last to return, given that India is often less significant for a global hedge fund during a global pandemic.
“Some people feared that foreign funds may not return after the pandemic, but everyone's India exposure is increasing. We are seeing increased interest from investors that had limited or low exposure to India, pre-COVID,” Sharma says.
Aside from consumer internet, business-to-business and software startups have also seen a speedy recovery in some cases. “B2B and SaaS have actually held up pretty well. I thought business and recovery would be slow, but for many startups, both existing and new clients are coming in, payment cycles are on schedule and people are closing sales effectively on Zoom,” Doshi said.
However, despite a significantly better sentiment compared to April, investors still advise portfolio companies to be cautious, because even before the pandemic, private technology companies were seeing the end of a historic period of exuberance, marked by Uber’s disappointing IPO and WeWork’s IPO debacle.
Further, India-specific issues, including a record 24 percent fall in GDP and unemployment concerns remain.
“One should always be cautious about the medium- to long-term impact around GDP shrinkage, unemployment situation and the devastating impact on certain industries. That shall only unfold over the next few quarters,” Sharma said.