Coronavirus impact: Early funding of start-ups may hit a stumbling block

Even though the spread of Covid-19 and the subsequent lockdown have severely affected the start-up ecosystem in the country, experts believe that many of them who are mostly in early stages, are going to find it extremely difficult to get access to funding once the situation improves. The venture capital (VC) investors, they said, would prefer to only invest in their existing portfolio to protect their investments than putting any fresh money into new ideas.

“Is the situation getting better in India, is it stabilising or is it getting worse? VCs or funds would see an opportunity to get in and get in early. But if the situation is getting worse, then for early-stage ideas, I think you’ll see a longer cycle (for raising money),” said Prashant Mehta, partner at VC firm Lightbox. “However, strong founders with great (entrepreneurial) backgrounds and economics will not have trouble raising money,” he added.

This comes as seed investments in India during the January-March quarter, which was hit by the lowest level in five quarters. According to data compiled by Venture Intelligence, seed-stage funding dropped 28 per cent to $48 million in the quarter compared to the same period last year. The number of deals, too, declined to 40 from 70 in the year-ago period.

According to Vishesh Rajaram, co-founder of Bengaluru-based VC firm Speciale Invest, historical data suggests that seed-stage funding environment would drop the most, though they would be the first one to bounce back. “A lot of our (portfolio) companies are assuming to low revenue for the next 6-9 months and projecting their road map for the next 18-24 months.”

Rajaram, whose fund largely focuses on business to business (B2B) deep-tech start-ups, was referring a Redpoint Venture partner Thomasz Tunguz’s study, which showed that early stage funding suffered a huge fall during the global financial crisis in 2008-09. Seed stage funding, however, was the fastest to recover among all stages.

According to experts, venture capital investors are going to monitor the whole situation closely over the next 1-3 months before making any decision on investment.

“Investment firms will now have the mindset to focus on protecting (their) existing investments and helping them sail through the next couple of quarters rather than looking at new investments, especially in unknown sectors,” said Sreedhar Prasad, an independent consultant and a former venture partner at Kalaari Capital.
 

The overall VC investment has also taken a hit in the March quarter of 2020. During this period, VC investments fell 22 per cent to $1.74 billion in value terms when compared with the same period last year, the Venture Intelligence data showed.