Venture Capital in the COVID-19 Era
Jay Krishnan, General Partner, Mantra Capital, believes ultimately, the risk is the same for all- mortality or lack of return on investment. Most funds work to mitigate it by being part of the founding team, helping the entrepreneurs get to market, bringing a sense of governance and digging deep from their own experiences to help the entrepreneur navigate difficult waters. Funds take a board and/ or observer position in a formal structure for exactly the same reason. Ultimately, like every other engagement, it will boil down to people and the relationship between them that allows for consonance and alignment towards a common goal.
With the fall in the Indian markets following the Coronavirus outbreak, risks involved in funding an idea has increased manifold. While startups are encountering difficult times, investors are still struggling to make sense of it. In an exclusive interaction, Jay, brings fore the challenges Covid-19 pandemic impact has brought in India's startup industry, strategies of navigating the business risks and leverage these challenging times. Jay has over 18 of tech and startup experience in USA and India.
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?
Venture capital has always been a primary catalyst of growth in all ecosystems across the world. It will be no different in India. $10B was deployed in 2019, more than 50 per cent higher than 2018. With the pandemic, there will certainly be a tightening of capital in Q2, and Q3. Q4 should see some liquidity coming back. Valuations will certainly see a markdown. Eventually the larger ecosystem of the country needs to see the ecosystem move towards an innovation mindset. Currently, most of the innovations are market- sided. The only way we'll see a change from the supply side if when there are educational reforms
Q. What are the challenges of the venture capital industry of the country at this moment? How is Mantra Capital approaching the ROI of the invested capital?
The biggest issue until recently was exits. That is certainly being addressed now. The last couple of years have seen some marquee exits. The makes the lives of not just entrepreneurs, but VCs easier as well. The other issue for entrepreneurs is access to liquidity. Ironically, while Fintech in India is leaps and bounds ahead of other countries, traditional Banking norms in India are archaic. While I'm not in a position to talk about other funds in India, the ROI approach and for almost all funds are variants of the 2-20 rule. The methodology might be different.
Q. How is Covid-19 pandemic impacting private equity and venture capital investments?
There will be capital tightening in Q3 and Q4. There will certainly be a recalibration in valuation as well. My take is that we will see new startup models emerge, which will take time to settle down. And the capital inflows into these startups will then pick up and hit steady state. New forms of capital through equity, debt, a mix of both will also emerge.
Q. Is Mantra Capital making any shifts or alterations in its funding process?
We look into early stage startups and primarily focus on the founding team. If the team is solid and has a good dispensation, regardless of market externalities, they'll sort things out. Next, we look at the product/ service and its differentiation from the competition. Then we look at the size of the problem it's solving. For us, it is imperative that the solution footprint be large, not just in terms of size but the impact in making lives better.
We, at Mantra Capital, stay committed to funding. Some of the best companies are created in a time of crisis. We would like to focus on non-traditional approaches to investment and seek opportunities that can create potential defining companies. Mantra Capital will keep advising its existing portfolio companies to rejig their operating plan and also look out for opportunities in this downturn for startups that can withstand this storm.
Q. Which startup segments are able to leverage these challenging times, to show growth and innovation?
Consumer tech, Software/SaaS, Fintech, and a slew of B2B sectors garnered 80 per cent of VC investments in 2019. The pandemic in 2020 will certainly lead to a spurt in growth of online commerce and healthcare. As of 2020, 390M out of roughly 490M on the internet are online through their mobile. This gives an indication of how there will be a generational leapfrogging into India becoming the largest internet population in the world. The sectors that are opening up correspondingly, will eventually all gravitate towards an internet- based discovery, service and delivery model.
Q. What strategies would you advise startups to sail through the tough times?
Startups and organizations in general always come out stronger after a black swan. We saw this happening in 2001 and in 2008. VCs will get into triage mode and assist existing portfolio companies. Fresh capital for new deals will slow down for now. But this is only a transient moment. Startups will have to work on retooling themselves to stay alive and sustain. Downtimes are also the best opportunity for startups to pivot. An example I can think of is SaaS companies with no incremental growth looking at a platform play going into the future.
Q. In what ways can the startups navigate their business risks amid the crisis?
Treat the new post COVID-19 paradigm as an opportunity and start addressing it proactively. CEOs need to don the hat of a leader and motivate teams, and don the hat of a manager and manage resources. Plan cash flow with a 4- quarter cycle (one having passed already). List your external and internal priorities and start tackling them one after the other. This is a once in a lifetime black swan event. Empathy across stakeholders is key.
Q. What can be said about the growth of the venture capital industry in India?
The VC industry has clearly grown in India not just in terms of capital available, but in terms of number of funds and the diversity of fund managers. Today India is one of the top three markets for private capital seeking early bets.