Economic downturn: Why investing in new-age businesses makes more sense now

October 17, 2019 3:21 PM

Credit and Finance for MSMEs: Making investments in the businesses of the future is a high-risk, high-return challenge, but it can prove to be hugely rewarding in this time of turmoil.

The global economy has come to a halt, and many first-world countries are facing the risk of sinking into a recession.
  • By Apoorv Ranjan Sharma

Credit and Finance for MSMEs: Having been recognized as the world’s fastest-growing economy, India is determined to become a superpower. Finance Minister Nirmala Sitharaman has also laid out an ambitious plan to realize this – turning India into a $5 trillion economy by 2024. However, critics of the plan have cast doubts about this plan’s feasibility, and rightly so. Currently estimated at $2.8 trillion, India’s economy needs to grow at the CAGR of over 12 per cent in the next five years to reach the $5 trillion mark. 

With government data putting the actual growth rate over the past quarter at less than 6 per cent, it seems like an unlikely feat. To make matters worse, the World Bank has cut India’s economic growth forecast for current fiscal from 7.5 per cent to 6 per cent. The country’s cyclical slowdown is severed, the bank noted in its latest edition of South Asia Economic Focus report. Amidst this economic slowdown, there is one demographic who is in a bit of flux – the investors. From VCs to HNIs, a large percentage of Indian investors are planning to lie low in the upcoming months. Even though economic uncertainty seems to be higher than usual, this is not the right approach. 

Why Invest?

The global economy has come to a halt, and many first-world countries are facing the risk of sinking into a recession. The scenario may not be as grim in India, but investors must take a different route to avoid a possible financial disaster. While investing in equities seems like a wise move from a long-term perspective, it doesn’t really address the impending economic slowdown. So, how do we tackle this situation? The solution lies in India’s thriving startup ecosystem. 

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Making investments in the businesses of the future is a high-risk, high-return challenge, but it can prove to be hugely rewarding in this time of turmoil. One might take a cue from Saudi Arabia’s Crown Prince Mohammed bin Salman, who recently contributed a whopping $45 billion to Soft Bank’s Vision Fund to support startups as an avenue for Saudi Arabia to reduce its oil dependency. Close to home, Anand Mahindra has always been a strong advocate for home-grown startups, expressing his views via Twitter.

Watch: The Economist – India Summit 2019

Thumb rules of Investing

Investing in a startup can be both financially and personally rewarding. However, it is crucial to conduct thorough research on the business, market, competitive landscape and founding members of the company to mitigate the risk. The first and foremost step is to understand the market the startup operates in. This will help you gain a broader perspective when projecting the venture’s potential for success. Certain sectors are expected to take the worst hit, and choosing the right is the key to surviving the downturn. Make sure that the startup has a scalable model so that your investments can yield an IRR (internal rate of return) of at least 25 per cent. 

The people running the company ultimately determines its success, especially for early-stage organizations. All successful entrepreneurs share a set of characteristics, such as a strong sense of direction, integrity, persistence and foresight. If the startup founders check these boxes, you’ve probably made the right decision. Check their previous track record and background (education) to see if your money will be in good hands. Here you’d like to where and why the startup intends to spend the funding. Also, review the salaries the founders plan to take home. 

One of the best ways to reduce risk is to evaluate the startup’s positioning in the market. Find out what competitive advantage they have to stay ahead of the curve. Moreover, you should be aware of the company’s net worth, revenue earnings, AUM, debt-to-asset ratio to have a clear picture. While you are at it, you could ask the founders to give you a roadmap of how they want to make profits and maintain sustainable growth at a time like this. Finally, it is critical to review the legal documents before making any decision. Pay special attention to the deal offered by the startup and what percentage of ownership you’ll get. 

Deflation could be the biggest challenge for investors in days to come, and investing in a startup appears to be the only safe bet. Do some research, meet the founders, and most importantly, follow your gut. In the long run, sectors like FMCG, residential real estate, private sector banks and capital goods sector are more likely to thrive as they have lesser debt in their balance sheet, higher transaction volumes and favourable regulatory policies. Choose wisely, and you should be able to sail through the worst.

(Apoorv Ranjan Sharma is the Co-founder at Venture Catalysts. Views expressed are the author’s own.)

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