Covid-19 Fuels New Startup Investment Patterns: Pankaj Makkar of Bertelsmann India

COVID-induced difficulties attached to fundraising are having various implications on the start-up ecosystem

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COVID-19 has adversely impacted the overall investments. While businesses across all sectors can sense the repercussions of COVID-19, start-ups have particularly been one of the most vulnerable, and in fact, are facing various formidable challenges, both from a business as well as from an operation’s perspective. Most start-ups have witnessed a decline in supply and or demand, except for those start-ups that are engaged in the supply and, or delivery of ‘essential services’, educational technology, gaming or streaming services. Notwithstanding the above, glitches in the supply chain network have either way presented challenges for all start-ups.

However, the start-up ecosystem has been continuously striving to adapt to the present situation as flexibly as possible, by focusing on the need to innovate and diversify their business techniques and its operations.

Given the global scale of the pandemic and the uncertain economic situations spurred by it, there is a strong likelihood that fundraising for start-ups would become a significant challenge in the future, since various investors may choose to focus their future fund deployments only on the existing portfolio companies in order to ensure that they are able to tide over the present global crisis.

“We are cautiously optimistic about the situation,” Pankaj Makkar, managing director at Bertelsmann India Investments, told Entrepreneur India during a webinar.

The coronavirus pandemic has had a deep impact on the economy as well as the Indian startup ecosystem. In the first six months of the current year, the equity fund inflow was down by around 80 per cent if one takes the month-on-month comparison.

“The VC landscape has certainly been impacted by the pandemic,” says Makkar. “COVID-19 and the ripple effect of economic, social and professional impacts have rocked every industry, including technology, and the way investors look at new startups is inherently through a COVID-19 lens.”

Makkar believes the investment industry has been adversely impacted by the outbreak of COVID-19, which has posed formidable financial and operational challenges through the first half of 2020. One of the hardest hit areas has been the startup space, with thousands of venture capital (VC)-backed companies contemplating a future that hangs in the balance.

To be sure, some startups have flourished during the crisis, particularly those supplying ‘essential services’, educational technology, and gaming and streaming products. Many of these have been able to rely on investment funds to ensure they meet a growing demand. Some cloud-based and technology focused startups have reacted directly to the COVID-19 pandemic, working on ways to track the spread of the virus or repurposing their innovations into tools that help save lives.

A quote that has been borrowed and used in the context of venture capital is a belief that “the future is here, it is just not evenly distributed.” Over the last decade, 500 plus start-ups have identified and invested in industries that have gone on to become widely distributed trends such as the rise of AI, FinTech, e-commerce, and more. “Our team is working closely with our portfolio firms on the daily challenges startups are facing in terms of operations, personnel, and finances,” adds Makkar.

Trends in the categories of healthcare, productivity tools, education, entertainment and logistics/supply chain gained momentum even before COVID-19, and the changes required by the global pandemic have radically accelerated–or rapidly distributed–that future.

Quarantine and lockdown have had an economic impact on small businesses and large corporations alike. However, when it comes to the global start-up scene, the carpet has really been pulled from under these companies’ feet. Given that they rely mainly on equity investments or convertible notes, they have been affected by the fact that in a downturn, these can turn into debt. The earlier stage the company, the bigger the risk.

They face a bleak future with the very real threat of running out of capital if the global economy does not begin to recover soon. Across the VC-backed space, revenue has been challenged and cash reserves are dwindling. Each month the pandemic drags increases the risk that more startups will cease to exist.

“My biggest view on finding opportunities to create best business model is to look at problem statements at the bottom of the apparatus. Figuring out a local problem that you are really passionate about and you think that you have a unique solution to the problem, and there you have your shock proof business model ready. It should be a really big problem, it should have an easy solution, it should have a large business or a larger segment so that you can build a good business around it , and most importantly, it should be monetizable,” Makkar establishes.

As early-stage start-ups have no revenue, the burn rate is mostly equal to their total monthly spending. Entrepreneurs should try to have a runway of at least six months to allow time to raise new capital. However, in a downturn scenario like the current one, six months is not enough to raise funds, and so it is crucial to extend the runway and start raising new funds earlier than planned; investors are more cautious and tend to focus on their existing portfolio prior to considering new investments.

The easiest way to keep the start-up afloat is by bootstrapping, relying on your own savings and revenue, cutting costs, this may include a hiring freeze, selling company assets or streamlining expenses. Both small and larger cost cutting can be combined, helping start-ups increase their runway to go through the current fundraising dry spell.

Anticipating that the COVID-19 crisis and ensuing economic downturn could last several years, it is crucial to calculate capital needed conservatively so that the next round of financing can be timed for a period of economic recovery.

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