Covid-19: VC funds see growth-stage startup funding to be worst-hit; tell entrepreneurs ‘cash is king’

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Published: March 26, 2020 5:00:51 PM

Among the areas likely to be impacted the most would be travel, hospitality, coworking/coliving, ride-sharing, in-venue entertainment etc. involving discretionary spending.

ICMR, coronavirus diagnostics, COVID-19, RNA extraction kits, coronavirus vases, latest news on coronavirusDelay in funding is likely to geographical as investors or funds based in critically affected regions might take more time than usual in decision making. (Reuters photo)

The Coronavirus pandemic would also get startups, looking for capital, embroiled in the current arduous condition. The funding deals are highly likely to take more time to close as the outbreak has pushed investors and decision-making process on the back burner with restricted movements and shift in priorities, according to multiple venture capital investors Financial Express Online spoke to. As the current situation develops in India without much certainty on its timeline until the World Health Organisation calls an end to the emergency, investors expect startups particular in the growth or late stage to take the maximum hit.

“For startups looking at raising foreign capital, especially later-stage rounds, due diligence and all such legalities will face delays due to travel restrictions across borders,” Mayank Khanduja, Principal, SAIF Partners told Financial Express Online. The fund, which had backed companies including Swiggy, Paytm, MakeMyTrip, JustDial etc, is still actively talking to new business over audio and video calls. “In fact, we are closing a term sheet and wrapping up documentation on seven-eight more deals while being under this lockdown,” he added. There is no change in its investment strategy or activity level currently. Among the areas likely to be impacted the most would be travel, hospitality, coworking/coliving, ride-sharing, in-venue entertainment etc. involving discretionary spending.

Due to the restraints on work and travel during this time, the delay in funding will be “mostly series-B and higher,” Anup Jain, Managing Partner, Orios Venture Partners told Financial Express Online. That’s because “they run on heavy burns which would increase because of sales going down,” another investor Ishpreet Singh Gandhi, Founder & Managing Partner, Stride Ventures told Financial Express Online. Hence, the timeline to raise the next round for such startups is ambiguous with cash runways reduced by half even as they could increasingly look at venture debt for shorter tenures. Another reason for the delay in funding is likely to geographical as investors or funds based in critically affected regions such as China, the US or Europe might take more time than usual in decision making.

Also read: Forget paying cash for your Amazon order amid lockdown as e-commerce company suspends COD option

Startups raising funds from investors based in these regions “could experience at least two-three months delay, since the decision-makers may assess the economic impact of COVID-19 before investing,” Venkat Vallabhaneni, Managing Partner at Inflexor Ventures told Financial Express Online. Inflexor is a new fund of $100 million launched last month by Vallabhaneni and Jatin Desai who had earlier launched another venture fund Parampara Capital.

The focus, suggested investors, have to be on cutting down cash burn including spending on ad and marketing for customer acquisitions and launching new services and instead focusing on core business activities and technology to help them bounce back and seek capital afresh with growth metrics intact. “Founders should keep their burn under check by optimizing marketing and operational costs while at the same time look to hire the right talent who might have got laid off elsewhere, launch innovative marketing campaigns as costs may be low,” said Khanduja.

The impact could likely be on early-stage startups as well as angel investors, early-stage funds etc. are focusing on conserving cash for their existing portfolio companies instead of investing in new startups. Moreover, since many startups are likely to miss their growth projections due to their existing cash being diverted to Coronavirus-related expenses, according to the Indian Angel Network, they might find it challenging to sustain business in the coming months.

“Reality is that early-stage startups are very vulnerable. They don’t have cash reserves like large companies. They would not going to make any projections and so next round of investor will not going to see the potential of the company because the market is gone not just disrupted,” Padmaja Ruparel, Co-founder, Indian Angel Network told Financial Express Online.

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