Investment in the Post-Covid World
Over the last six months, I was fortunate to interact with more than 100+ startups. Furthermore, having interacted with angel investors, investment bankers, CEOs of incubators/accelerators, and others, I realized that startup funding has become a more urgent requirement in the post-Covid world. Here are some of my thoughts:
The worst is behind us:
During Covid, the recent Zinnov report suggests a 50% dip in overall funding compared to pre-Covid days and 40% of the startups were negatively impacted. Covid disrupted severely consumer behavior, business operation, supply chain resulting in lack of revenue, growth prospect, and drying up of the institutional risk capital. For many startups, survival was the challenge and they were forced to shut down. This has resulted in VCs focussing on existing portfolio companies and ensuring good startups in their portfolio survive and get more funding. Capital was blocked for the winners in VCs’ portfolio. During this period, funding to new startups were nearly frozen.
Things are looking brighter since November. The low number of daily Covid cases and approval of vaccines have certainly helped in starting economic activities. This should help startups that are looking for new funds going forward. Dunzo raised $40Million and last week alone US$166 million was invested in Indians startups across 26 deals.
Darwin’s theory at play:
“Survival of the fittest” Darwin announced the existence of species. The same is true for the startups in general but Covid came as a meteor accelerated the closing of startups. Now we have startups that have survived very difficult times and they are likely to thrive in better economic activities. During Covid, EdTech, HealthTech, and hyper-local startups had tailwinds and they did well. For example, Startup IamHere hyperlocal app doubled their app downloads with half CAC during the Covid period.
Going forward, I believe other domains are likely to get more traction as there will be fewer and better startups that have survived and will be chasing money. Whereas the success of EdTech and others have attracted more “me-too” startups. Competition is likely to be tough for funding in these domains.
Revenue will be an emperor
The post-Covid era will value revenue traction as a critical parameter for funding. Startups with negative unit economics with higher cash burn and no revenue will find it extremely difficult to raise funds. There are many reasons for this trend. Firstly, this trend was there but it just got accelerated due to Covid. Secondly, investors’ exit cycles have become longer from their current portfolio. This will also result in lower RoI. This will further lead to less risk appetite from the investors.
Expect a more stringent due-diligence process from the investors.
Cheer for Tier 2/3 cities startups
As per the government data, 45% of the startups in India are in Tier 2 & 3 Cities. They may become the biggest beneficiary in the post-Covid world. There are several reasons for this. During the pandemic, several companies allowed work from home. This has resulted in the moving of skilled and labor resources from large cities to smaller towns. Digital penetration, the lower-cost living are the enablers for the ecosystem. But their impact will be greater in the post-Covid world as a shift in behavior and acceptance of video calls as an effective way of communication.
In summary, positive trends are emerging in 2021. The funding climate will be more benign than 2020. Startups with strong execution capability and revenue traction are likely to be winners.
Wishing all startups a very successful journey in 2021.