How will funding for Indian start-ups change post Covid-19?

The funding for Indian start-ups took a hit in March and April, as anticipated, due to the Covid-19 pandemic. While investments fell 81.1 per cent to $0.33 billion in March 2020 from $1.73 billion in March 2019, April 2020 saw the funding figure plunge a further 84.3 per cent year-on-year to $0.12 billion, compared with $0.78 billion in the same month last year, according to data from Tracxn, a firm that tracks investments and financials of private companies and start-ups. In such a situation, how will investments pan out in the upcoming months? Investors say they are going to be a little more exacting about cash flows and focus more on how much of a cash runway the company has, in the post-Covid-19 scenario.

In the post-Covid-19 setting, there would be greater emphasis on business models that have the ability to sustain cash for longer, and on businesses with higher contribution margins, said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India, a firm that provides growth capital and management support to small and mid-sized enterprises in the country.

Reducing cash burn

Ajay Hattangdi, Managing Partner of Alteria Capital Advisors, a venture debt fund, said firms that have a certain amount of resilience to downturns such as this pandemic will be increasingly looked at. He added that to some extent, companies that haven’t achieved unit economics are going to be more and more difficult to fund.

“The amount of cash companies have, and the pace at which they are burning through the cash ― those aspects are going to be looked at much more carefully from here on, going forward,” said Hattangdi.

More focus on tech

At a time when most organisations are working remotely, the technology element is coming in handy. Start-ups that are building solutions using artificial intelligence (AI) , machine learning (ML) and deep learning are now picking up momentum. Investors said that they would now want to focus more on such companies, along with those that provide automation, remote control and monitoring solutions, and the ancillary businesses around them.

“We have been anyway talking about IOT, AI, and ML applications, and with this whole thing, I think, the use of those technologies would be expedited,” said Vikram Gupta, Founder and Managing Partner, IvyCap Ventures, a venture capital firm. He added that sectors such as telemedicine, ed-tech and fin-tech will flourish in the post-Covid-19 scenario and anybody who has already built a business around those and have the technology and customers, will be in the limelight and investors would want to provide them with more capital.

“Specially at early stages, usually as VCs, we want to see the proof of the pudding before we start investing. But now we will be going up to those companies and asking them a lot more questions, and even if they are not fully developed yet, in terms of the product, but they are almost there, you would want to take a higher chance on these things,” Gupta said.

Zephyr Peacock’s Raina said that they would place more emphasis on essentials. He added that for the portfolio of companies they have already invested in, they are trying to explore more scope for them to grow, even if it means altering their business models in the post-Covid-19 world.

“How fragile is the model that you are looking at in a Covid-19-scenario, is the fundamental question everybody is going to be asking,” said Alteria Capital’s Hattangdi. “You don’t want something that is fragile, and to quote Taleb, you need something that is anti-fragile, in the sense that, when a Covid-19 scenario happens, which are the models that are going to benefit from it? Those are the automation models, the diagnostic models, and the healthcare services. These are the kinds of models that are anti-fragile, and these are the ones that are going to be more interesting for investors to look at in the future.”

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