If 2019 was the year of valuations that catapulted a new breed of technology companies worldwide into the ‘unicorn club,’ 2020 has witnessed a sharp decline in early-stage funding. According to CB Insights, capital from seed-stage funding accounted for nearly 80 per cent of the decline in deals in Q1 2020 as investors adopted a more cautious approach in the pandemic-induced economic downturn.
As Q1 drew to a close, worldwide lockdowns and disruptions caused by COVID-19 compelled investors to stall funding and move away from early-stage bets. From a global perspective, venture capital-backed companies raised $61 billion across 4,260 deals in the Q1 of 2020. However, as the pandemic grows, funding dollars backing high-value deals is projected to dry up in Q2 2020 and beyond. Venture capital (VC) investments in Indian startups have seen a downward trajectory, falling sharply to $2.2 billion in Q1 2020 from $6 billion in Q4 2019. According to a recent Nasscom report, nearly forty per cent of startups have temporarily halted their operations or are gearing for a shutdown.
Undoubtedly, the novel coronavirus has caused major disruptions to business continuity and put investors on edge. As nations across the world are beginning to feel the full impact of the virus, the funding landscape has altered to adjust to the new normal.
Funding patterns amid COVID-19
In normal times, investors take anywhere from three to nine months to close a deal. However, COVID-19 has presented an unprecedented challenge for VCs and there has been a sharp decline in deal flows in India, with May registering as many as 20 deals falling through.
Further, 4changes forced by the virus has transformed startup investment patterns. There has been a newfound interest in funding startups in sectors, such as EdTech, FinTech, HealthTech, Fast Moving Consumer Goods (FMCG), mobility and home entertainment.
Funding in the EdTech space in India has remained robust despite the pandemic and BYJU’s, valued at $5.7 billion, has attracted funding from large investors, such as Tencent, Chan Zuckerberg Initiative, Sequoia Capital India, IFC and CPPIB. BYJU’s raised $400 million from General Atlantic and Tiger Global, making it the sixth-largest VC deal in Asia in Q1 2020. Unacademy, another key EdTech player, raised $110 million from Facebook and General Atlantic. Mobility startup Bounce raised $150 million in an economic climate that saw a decline in the early-stage deal pipeline.
While angel/seed/Series A deals have taken a severe hit due to COVID-19, Series D+ rounds will be spared the brutal aftermath of the pandemic. Valuations will also be more rational in 2020, compared to 2019 that was the year of unprecedented unicorns.
The novel coronavirus has intensified the need for technology adoption across sectors. Social distancing and other hygiene regulations to combat COVID-19 have forced consumers to alter their lifestyle and embrace new behaviours. Thus, changing consumer behaviour has led to the emergence of other big gainers in sectors such as e-commerce, gaming, biotech, life sciences and pharmaceuticals.
However, the going hasn’t been smooth for travel startups across the world. According to a report, the travel market was expected to reach $13.6 billion by 2021. But COVID-19 has put a dampener on the outlook for the travel sector for 2020. VC investments in travel startups were $1,029 million in 2018 (including $1 billion in Oyo Rooms), but have dropped to only $15 million in a single deal in 2020.
Survival of the fittest
All things considered, the investor community views the pandemic as an opportunity to identify new trends and strengthen the financial system to move beyond the crisis.
If there is one thing that has remained consistent during these uncertain times, it’s the ground-breaking innovation by startups. It is now recognised that only companies that are proactive and adjust to the changing environment will survive the aftermath of the virus.
For instance, Swiggy and Zomato, India’s leading food delivery startups, pivoted amid the crisis and began delivering alcohol in some cities as a way to generate additional revenue. The startups were compelled to innovate as their core business was severely hit due to restaurants remaining shut during India’s prolonged lockdown. Since Indian startups are in the survival mode, several established and new startups alike, such as MakeMyTrip and Zoomcar, ventured into uncharted territory during India’s lockdown. For example, MakeMyTrip launched a new ‘Stores’ feature on its app that facilitates grocery deliveries. Zoomcar partnered with BigBasket, Grofers and MilkBasket for last-mile delivery services.
Funding in the post-COVID-19 scenario
Industry watchers believe the post-COVID-19 world will be led by ‘trends’ that will see specific sectors becoming beneficiaries of venture capital funds. For instance, investors will continue to fund EdTech and HealthTech startups as they believe these sectors have the potential to sustain even after the dust has settled.
COVID-19 has compelled VC funding to reboot and study the macroeconomic environment before backing new startups. Also, the post-pandemic period will be the time when investors will reassess how they reach valuation estimates and how the money will be invested in high-risk startups.
If startups have to come back stronger, they need to tighten their belts by conserving cash, as the new normal is unlikely to see fantasy valuations from investors. Venture funding has been reset and investors will scope out digital-only models as opposed to traditional business models.
These investment strategies apart, what will truly reboot the investment landscape to cope with future calamities is the creation of a resource pool for entrepreneurs. Interestingly, COVID-19 has created a growing community of investors and founders, working towards the common goal of adapting to the long-term market dynamics presented by the pandemic. For instance, She Capital, an early-stage fund that invests in women-led businesses is building a resource library for women entrepreneurs to identify avenues for loans and other learning modules that will help them in their entrepreneurial journey.
Another positive outcome for the funding landscape has been the emergence of philanthropic investments that are backing innovative startups focused on solving problems related to COVID-19. Investors, corporates, governments and other stakeholders are funding such startups that will make a positive difference to the innovation ecosystem in the long run. It is a welcome development at a time when investors have stalled funding or are exiting deals. Bexley Advisors is one such investment bank that is funding innovators through its COVID-19 Action Fund initiative.
If the current momentum of investors empowering startups is sustained, it won’t be long before startups emerge stronger, more resilient and richer on the other side of the crisis.
T-Hub continues to enable and empower startups in this hour of crisis through various programs. The call for applications for our flagship program, Lab32 is open now. Apply here.