Startup Funding: Keeping Up With the Tide
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In the last few weeks, I have had more investors and founders reach out to ask how LetsVenture was doing than any other time in our six years of existence. What people have also tried to gauge is the general appetite for private market investments in the light of COVID-19. The concern is obvious—these are unprecedented and overwhelming times. While the world at large battles the virus, the economic instability is what will cripple us for a timeframe that will outlive the immediate impact of the healthcare crisis.
However, as the founder of India’s only startup investment marketplace where we are not a participant, only an enabler—we see the signals on the ground very differently. In March, as we started seeing the early signs of COVID-19 impacting businesses, we reached out to investors on our platform. Our conversations validated what we knew—investors who had public market leverage had their capital locked, investors who were business owners were busy fire fighting internally and did not have much mind space to review new business ideas. Yet, a large number of investors on our platform (close to 42 per cent) said they would continue to invest, if they found a “good transaction”.
Over the last six years, LetsVenture has on-boarded close to 6,500 investors on the platform, from 55 countries. Our investor is typically the next generation leader of a family business, an entrepreneur, a CXO and the global Indian.
Before I go into numbers and trends for the remaining two quarters of the calendar year, I would like to talk to you about what angel investing means. Angel investing is when you invest into private unlisted markets, aka startups, at very early stages—usually within two years of founding—and when the company is starting to find product market fit. Today, India sees about 3,000 ventures get started every year and in 2019, $178 million was raised across 533 early stage deals wherein angel deals stand for funding of up to $1 million (approximately INR 7 crore, while seed capital is typically the first INR 50 lakh cheque). Anyone who invests into startups knows it is a high-risk asset class, where the probability of failure is upwards of 70 per cent.
So, why do people continue to invest in startups? The most commonly cited reason is that startups offer a way to stay in touch with the rapid changes in technology and market behaviors, as well as provide investors the lens to see entrepreneurship at a closer range. An important underlying reason, not often cited in public discourse, is to ‘make money’—a typical angel investment returns 10-15 times. Thus, when you seek return, you need a good entry price. Very high valuations very early on are a no-win for everyone as investors struggle to get returns and founders end up building businesses to justify ephemeral numbers. I would say that the private markets had been pushed in this direction, not just in India but globally, since 2018 and this run has been brought to a screeching halt by COVID-19.
Economies are shrinking, user behaviors are changing, and investors are becoming cautious about where they invest. We are seeing more stringent diligence, and investors taking more time to make decisions. On the founder side, I believe times like this create clarity of thought, only those who are completely certain they have all answers, will try and build companies.
As an investor on LetsVenture, in the past six years, I have never seen a founder create a slide on how their business will overcome an economic downturn. Now every founder first starts by explaining how they are building their venture to overcome the crisis. Historically multi-baggers are built during a crisis, as every day lived circumstances provide clarity into problems that really need to be solved. These are also the problems that customers will pay for as capital might be difficult to raise.
All these are good theories but only numbers can further validate the thesis.
· Indian early stage ecosystem in 2019 funded 578 deals with $1.23 billion (this includes angel, pre-Series A and Series A).
· Here’s the kicker, between January and May 2020 we have seen $1.07 billion invested in 351 deals.
· Close to 70 per cent of the previous year’s deals have been done till May.
· Average ticket sizes have gone up from $201,000 to $300,000 at the early stage.
The trends reflect similarly on LetsVenture where we had our best quarter from January to March in 2020 where we helped 26 startups raise angel funding on the platform. Just for context, in calendar year 2019, we closed 55 deals on LetsVenture. By early March, we started seeing the COVID-19 impact and I had expected deal numbers to drop significantly last quarter, but we have seen only a marginal decrease. And this is without any material correction in valuations yet; which we see happening closer to the October-November timeframe.
I do believe this goes back to the basics of angel investing. Angel investing is not like public markets where you get instant liquidity; the exit horizon, if you are lucky, is typically 5-8 years. Imagine markets in 2025. Some of these very startups might have leveraged changed market behaviors and would have become large companies not just as a function of funding raised but as a business too.