Funding became a popular concept in India for early-stage companies. Every venture capitalist became seed investor because it promised more variety. The whole point of funding is that it is a very long game. The average time to exit is eight years and the early exits are often not successful. During times like now when there is a lot of cash crunch, it can be said that the eight years span may not be fulfilled. Investors need a lot of patience and the ability to suffer the losses with the revenues.
It is essential to know that VCs are not immune to the economic impact of the pandemic. Moreover, these companies tend to be more prone to losses during these adverse times. Company boards to make stringent decisions with regards to investments and the sort of funding they need.
Venture capitalists, the lifeblood of the startup ecosystem are the most essential part for any company. With the pandemic going on, various industries have changed for the good and some have changed for the bad. But this change is only limited to the boundaries of the company. When we talk about the change in the venture capitalist, if they change, the whole startup ecosystem will collapse.
2019 was a big hit for the Indian start-ups. 50% of the start-ups received funding. Nine start-ups joined the unicorn club and were publicly listed.
When we talk about the short-term impact, it is said that early-stage businesses are more vulnerable to external negative impact. Companies which have just been started and are receiving funding for like the first time will be worst hit. Smart companies will survive by reducing their expenditure. Longer-term investments can be postponed.
The major issue with the VC going on right now is that there is a cash crunch all over the world. Public markets are crashing and the funding companies have become very cautious. Various global investors have decided to cut off some large deals. The startup funding for the march was less by 50%.
With the new revision in the foreign direct investment policy, it is said that many investments will come to a halt. The new policies game to limit opportunistic takeovers of Indian companies during this sensitive time. According to the new guidelines, any investor of a nation that shares land borders with India will now require approval by the government for making any investment in India. This major rule came after the Chinese investors increase their stake in one Indian company. Point to be newly noted from this is that majority of the Indian start-ups have Chinese funding. With this rule being passed, the Chinese investment will reduce and the start-ups in India will not be like before.
18 out of 30 unicorns in India have Chinese investors. There is more than $8 billion investment by the Chinese in the Indian companies.
RISE OF SEGMENTS
The funding for various segments will drive down but for a few of them, it will be on the rise the. Start-ups which are related to FMCG, online grocery delivery, education, cybersecurity are seeing an increase in user demand due to which they will lure the investors. The pandemic has created opportunities for these segments. Some companies are already showing growth and some are dying down. A lot of effort is required from the government’s part to implement policies which are positive in nature and only lead to economic growth.
Various capitalists are trying to liquidate their funding so that they can have some cash flow. They will indulge in secondary transactions for sales. the first quarter of 2020 had the funding of $2.2 billion which was a record low for the start-up ecosystem. Deals will get deferred in the future and the term sheet will be withdrawn. If in the long term, the foreign direct investment policy is not changed for the better, the Indian start-up ecosystem might not receive the funding it wants to receive. It is to be noted that a primary source of funding for the investors in the stock market and right now the stock market is going down.
In the next quarter, already established companies which are doing well will receive funding. This will be done so that these companies give out positive returns. The funding experience in 2020 will be very challenging but if the companies need to get returns, they need to take the risk and go ahead with the funding. The whole funding is will be done more rationally. Companies which were in the fund-raising stage will see a slowdown for the funding. Others who were in the portfolio will see investment. Those which were in the process of trying to raise money can say goodbye to the investments right now.
A few of the investment companies have said that the deal flows into the country have already been impacted by China. Some of the Chinese investors have withdrawn their funding because of the rules that are passed. All the investments by Alibaba and Tencent will come under government scrutiny. It is also said that if the deals are not fast-tracked in India, the funding will go to other economies that are more emerging.
The investors are hoping that the government will roll out a fast track mechanism for investments at the early-stage deals.
92 Indian start-ups including the unicorns are funded by the Chinese investors. All these companies will see a stark comparison in the money being flown.
The pandemic will surely change the landscape of investment in India. Companies which are into the travel segment will obviously see a decline in the investment. Companies in the hospitality sector, sectors which are not at a boom right now will face a slowdown. At the same time, firms which are promising a return on investment will continue to receive the funding because the major concept of VCs is that they want to receive returns. The venture capitalist will find the right investment and pour their funding into that domain.
Finding the right company comes with experience because the aftermath of any firm cannot be predicted. It needs to be realised that a single investment return will only come if these VCs decide to take the risk and move ahead.