Is venture capital worth the risk is the burning question now. As we know, Covid-19 has thrown up challenges which have been most deterrent to startups. There are challenges in terms of product relevance, pricing relevance customer retention, supply chain disruptions, employee management and then there are challenges on the investment side. Startups encounter difficult times and those who are in the early stage and in the fundraising cycle face an uphill task and some sadly shows signs of perishing. Those startups who can adapt by revisiting burn, product roll out strategy, hiring and customer acquisition cost can expect to survive by judicial allocation of available cash in their balance sheet. In the current situation, with credit lines and venture funds running dry, reasonable financial support is key.

In an exclusive interaction, Anirudh Damani, Managing Partner, Artha Venture Fund talks about the Covid-19 impacts on private equity, venture capital investments and startups and helps me understand India’s venture capital ecosystem better. As a 4th generation entrepreneur, Anirudh has an impressive portfolio with over 60+ investments, participation in over 100+ funding rounds and a 60 per cent IRR. Some of his notable investments include Oyo Rooms, Exotel, CoutLoot, Tala and NowFloats.

Q. Considering the substantial growth of startups all over the country, how is the venture capital ecosystem being instrumental in the all-round growth of newbies?

Before venture capital, the founders did not have a knowledge reservoir to tap into to help them with starting up, scaling, or building their businesses. Once founders set up companies, VCs invested in them, the stories got picked up by the media, and the best practices and common mistakes got addressed in a public forum. Today, founders have a treasure trove of knowledge to access and avoid the same mistakes.

India's VC ecosystem is doing very well, where entrepreneurs have support from the idea stage – until they get acquired by corporates. Incubators can help them build a semblance of a company around their idea, before approaching VCs for early-stage and seed-stage rounds of funding, and finally getting acquired by Indian corporates. 10-15 years ago, this ecosystem did not exist. Therefore, the VC ecosystem goes beyond just the funding aspect. It has put together advisors, mentors, frameworks, with access to experienced capital. All that put together leads to the growth of companies.

Q. What are the challenges of the venture capital industry of the country at this moment? How is Artha Venture Fund approaching the ROI of the invested capital?

The complete disruption of the business cycle has been the biggest challenge for the venture capital industry. Being stuck at home for an extended period has led to permanent behavioral changes; therefore, what I thought might happen 5 years from now is becoming mainstream today.

People would like to discuss their medical issues online with their physicians rather than visiting the clinic and risking cross-contamination. In that sense, these behavioral changes have required VC investors to be nimbler and refocus their lens.

As for our approach towards ROI and invested capital, the way we structure things at Artha is by diversifying our portfolio at the seed stages, and then concentrate investments in the follow-up rounds. If we make 40 investments at the seed stage, we only make 20 at Pre-Series A, and 10 at Series A.

Although we are cutting down on the number of investments, we double the size of them, following what I call the 2-4-8 Model. If we invest ₹2 crores in the seed round, we will invest ₹4 crores in the Pre-Series A and ₹8 crores in Series A. This approach allows us to diversify our portfolio initially while concentrating the overall fund's investments to the best-performing companies through the follow-on rounds. This approach ensures that over 2/3rds (around 70 per cent) of our fund’s corpus goes into the winning companies, therefore, guaranteeing a market-leading ROI.

Q. How is Covid-19 pandemic impacting private equity and venture capital investments?

The most significant impact had been that fundraising has come to a halt for venture capitalists, and many LPs and family offices are waiting for some resolution to the uncertainty before they resume writing cheques.
What is exciting in the last couple of weeks is a strong inbound interest from investors and family offices. In the recent stock market meltdown, the smart investors realized that public markets aren’t as 'safe' as they thought.

The public markets were more volatile than private markets and turned portfolios upside down in a matter of days. Investors also realized that liquidity is a myth when individual stocks drop 50-60 per cent in the blink of an eye every 4-5 years. Looking at steep losses, many missed out the turnaround rally that (once again) pushed public market valuations to unconducive levels for smart investing.

In comparison, private market valuations self-corrected quickly, offering excellent opportunities for bargain hunters. Most of the founders rapidly cut costs and realigned business models to combat the new economic reality. Therefore, most startups entered Unlock V1.0 relatively unscathed but infinitely wiser.

Finally, in the new economic world where a preference for digital mediums will demolish old methods of conducting business, new-age startups backed by innovative capital will redo the established order. And when I think about companies that will change the world in the next 5-10 years, I do not see them coming from the listed space.

Q. Is Artha Venture Fund in the process of working out a strategy to deal with this crisis? Is it making any shifts or alterations in its funding process?

The Covid pandemic wasn't a known crisis, so many of the valuations and opportunities that got set up before it would have changed. For instance, if a company had given a valuation to an offline brand could renege on the offer since the crisis affects their investment in a significant way. If their business plans are changing significantly, the investor has the right to walk away from the deal, or better yet, re-negotiate. That is the art of the deal. Thankfully, we haven’t been in this situation ourselves because we usually don't write very high valuations, so there wasn't not much to change.

The first thing we did was ensure our portfolio companies made it out of the crisis alive. It meant they either needed resources in terms of funding or new revenues, and cut down on costs, and some of them even raised half rounds. We created a 21-point action plan for our companies and ensured that they all made it through the phase of the lockdown.

In terms of fresh investments, we had already informed out investors that 2020 was going to be a tough year – but the lockdown only made it infinitely tougher. We are contrarian investors; therefore, I believe in investing in a bear market to invest in VC, i.e., when nobody else is willing to write a cheque because that is when you get the best valuations and deals. When the market churns, we find most of our investments multiply shareholder value. Therefore, instead of making alterations, we have gone back to our playbook from 2012-2016 when the market found itself in the same situation. We will do the bulk of our investments in this period.

Q. Which startup segments are able to leverage these challenging times, to show growth and innovation?

It happens in phases as the ecosystem, and the Indian economy grows and attracts more investment to fill in the market gaps. Back in 2007-2008, there wasn't an ecosystem to buy products online, which gave birth to companies like Flipkart and Snapdeal. By the early 2010s, industries like mobility and ticketing online also started gaining traction.

Now, among schools and gyms, multiple other industries that required people to assemble have been severely affected. To address this issue, we have seen an increasing number of digital platforms thrive in this time, like Edtech, Healthtech, video conferencing, collaborative platforms for SMEs, and more.

Other gaps that got created due to the evolution of the ecosystem include brands catering to becoming healthier, improving immunity, telemedicine. Once we find a solution to Covid-19 and things start to return to normal, there will be a new gap in the market for founders to fill. It is a cycle, an evolving cycle.

Q. What strategies would you advise startups to sail through the tough times?

Do whatever it takes to survive. Cut costs, discover and capitalize on new business lines, but whatever it is – survive. This crisis will pass just like the ones before it did. But if your startups survive the winter, it will make the bank when the sun is out. Covid-19 was a wakeup call for the Indian startup ecosystem. Many startups operating with negative unit economics vanished in the fallout. Startups that built real businesses with positive unit economics have thrived. Their margins acted as a source of funding or "customer capital," keeping growth intact and the doors open. I believe, the startups that navigate this crisis will be more robust and resilient, ready to take on any challenge.

Q. What can be said about the growth of the venture capital industry in India? Commemorate on your assumptions on the future this industry holds in the country?

The North Star metric from the Indian VC industry is the participation of family offices and corporates in the ecosystem. Until 2016, most of the top Indian companies did not participate in venture capital as they considered it to be too high risk. But it wasn’t until businesses like OYO, Ola, Byju's, etc. became so big that their disruption bankrupted established industries. A case in points, there was a point at which OYO got valued at more than all the listed hospitality listed companies combined! In 8 years, OYO took on business that had existed for over a century and started eating their lunch after gobbling their breakfast. Such examples were a wakeup call for family offices and corporates to start investing in startups and get ahead of this oncoming disruption than getting steamrolled by it.

I believe India will be one of the most vibrant VC ecosystems in the world – we have the most significant consumer population in the world, living in a democracy with an open market – where else is this available in the world? Crystal gazing ahead 5-7 years, I expect venture capital investments in Indian startups to increase by 5x – at least.

Q. VC funds smell new startup opportunities in a post-Corona world. What will be Artha Venture's upcoming course of action?

We're planning on making 12-15 investments over the next 8-10 months and deploying most of our funds in this period. I'm a big believer in Warren Buffet's philosophy that "when others are fearful, one should be greedy" – so we're greedy, but judiciously.