The Changing Startup Investment Landscape

The years of sustained economic growth has been brought to a standstill with the outburst of an unprecedented pandemic leading to unemployment in the country, massive health crisis and existential threat for companies. Seems like the year has brought with it a paradigm shift for many businesses, irrespective of location and vertical. Ever since the crisis went on to become a worldwide pandemic, startups have been adversely affected and, in many cases, even set back by a year. Struggling to obtain funding, startups in particular, reveals a slightly more complicated reality.

Over the past few months, companies and startups are realigning their objectives to survive amid the crisis and beyond it too. A weakening economy, coupled with certain sectors such as travel, mobility, and hospitality witnessing record low demand, have forced many early and late-stage ventures shift to newer strategies and business models. Money has become tighter in startups and the investment landscape looks entirely different now. Venture capital firms, investors have become more cautious than ever – be it with new investments or the ongoing ones.

Startups will need to refocus and revise their growth outlooks, with stakeholders ultimately making similar adjustments

"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. This crisis will pass just like the ones before it did. But the startups that navigate this crisis will be more robust and resilient, ready to take on any challenge," says Anirudh Damani, Managing Partner at AVF.

Industry experts believe that the need of startups to raise capital will only shoot up in a post-covid world; the reason being their attempt of expanding to new markets and retaining the existing clients. This is primarily for the consumer-driven startups that have been coping with the changing customer behaviour and expectations.

Startups will need to refocus and revise their growth outlooks, with stakeholders ultimately making similar adjustments. At the same time, given the steadying economy, venture capitalists will have to strategically pick their investments to ensure that any new portfolio additions align with their exit strategy, risk profile, and ROI timeframe.

Categorizing the Right Investment at the Right Time
A few months back, some of the major venture capital firms such as Accel, Lightspeed, Sequoia, Nexus Venture Partners united and wrote an open letter to startups to about being watchful about the difficult times ahead. 'Fundraising outcomes are not only dependent on business and its metrics but also the macro environment,' an excerpt from the letter read. It further stated that positive fundraising outcomes will also take longer than usual in these times. And startups have to be patient.

This clearly indicates that investment timelines too can be challenging, depending on the extent of disruption of covid-19 and its effects on startups. The growing uncertainty is an example of why currently investors are wary about investing. "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. New forms of capital through equity, debt, a mix of both will also emerge," mentions Jay Krishnan, Partner at Mantra Capital.

In a nutshell, the success of startups and those in venture capital space will only be depending on identifying the emerging opportunities and the will to stay ahead of the game. While VC investments in India might be challenging in the short-term, time will prove whether or not the pandemic will prove to be as disruptive and enormous.