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Investors tell Indian startups to ‘prepare for the worst’ as Covid-19 uncertainty continues

Just three months after capping what was the best year for Indian startups, having raised a record $14.5 billion in 2019, they are beginning to struggle to raise new capital as prominent investors urge them to “prepare for the worst”, cut spending and warn that it could be challenging to secure additional money for the next few months.

In an open letter to startup founders in India, ten global and local private equity and venture capitalist firms including Accel, Lightspeed, Sequoia Capital, and Matrix Partners cautioned that the current changes to the macro environment could make it difficult for a startup to close their next fundraising deal.

The firms, which included Kalaari Capital, SAIF Partners, and Nexus Venture Partners — some of the prominent names in India to back early-stage startups — asked founders to be prepared to not see their startups’ jump in the coming rounds and have a 12-18 month runway with what they raise.

“Assumptions from bull market financings or even from a few weeks ago do not apply. Many investors will move away from thinking about ‘growth at all costs’ to ‘reasonable growth with a path to profitability.’ Adjust your business plan and messaging accordingly,” they added.

Signs are beginning to emerge that investors are losing appetite to invest in the current scenario.

Indian startups participated in 79 deals to raise $496 million in March, down from $2.86 billion that they raised across 104 deals in February and $1.24 billion they raised from 93 deals in January this year, research firm Tracxn told TechCrunch. In March last year, Indian startups had raised $2.1 billion across 153 deals, the firm said.

New Delhi ordered a complete nation-wide lockdown for its 1.3 billion people for three weeks earlier this month in a bid to curtail the spread of COVID-19.

The lockdown, as you can imagine, has severely disrupted businesses of many startups, several founders told TechCrunch.

Vivekananda Hallekere, co-founder and chief executive of mobility firm Bounce, said he is prepared for a 90-day slowdown in the business.

Founder of a Bangalore-based startup, which was in advanced stages to raise more than $100 million, said investors have called off the deal for now. He requested anonymity.

Food delivery firm Zomato, which raised $150 million in January, said it would secure an additional $450 million by the end of the month. Two months later, that money is yet to arrive.

Many startups are already beginning to cut salaries of their employees and let go of some people to survive an environment that aforementioned VC firms have described as “uncharted territory.”

Travel and hotel booking service Ixigo said it had cut the pay of its top management team by 60% and rest of the employees by up to 30%. MakeMyTrip, the giant in this category, also cut salaries of its top management team.

Beauty products and cosmetics retailer Nykaa on Tuesday suspended operations and informed its partners that it would not be able to pay their dues on time.

Investors cautioned startup founders to not take a “wait and watch” approach and assume that there will be a delay in their “receivables,” customers would likely ask for price cuts for services, and contracts would not close at the last minute.

“Through the lockdown most businesses could see revenues going down to almost zero and even post that the recovery curve may be a ‘U’ shaped one vs a ‘V’ shaped one,” they said.

Indian tech startups raised a record $14.5B in 2019

Indian tech startups have never had it so good.

Local tech startups in the nation raised $14.5 billion in 2019, beating their previous best of $10.5 billion last year, according to research firm Tracxn .

Tech startups in India this year participated in 1,185 financing rounds — 459 of those were Series A or later rounds — from 817 investors.

Early stage startups — those participating in angel or pre-Series A financing round — raised $6.9 billion this year, easily surpassing last year’s $3.3 billion figure, according to a report by venture debt firm InnoVen Capital.

According to InnoVen’s report, early stage startups that have typically struggled to attract investors saw a 22% year-over-year increase in the number of financing deals they took part in this year. Cumulatively, at $2.6 million, their valuation also increased by 15% from last year.

Also in 2019, 128 startups in India got acquired, four got publicly listed, and nine became unicorns. This year, Indian tech startups also attracted a record number of international investors, according to Tracxn.

This year’s fundraise further moves the nation’s burgeoning startup space on a path of steady growth.

Since 2016, when tech startups accumulated just $4.3 billion — down from $7.9 billion the year before — flow of capital has increased significantly in the ecosystem. In 2017, Indian startups raised $10.4 billion, per Tracxn.

“The decade has seen an impressive 25x growth from a tiny $550 million in 2010 to $14.5 billion in 2019 in terms of the total funding raised by the startups,” said Tracxn.

What’s equally promising about Indian startups is the challenges they are beginning to tackle today, said Dev Khare, a partner at VC fund Lightspeed Venture Partners, in a recent interview to TechCrunch.

In 2014 and 2015, startups were largely focused on building e-commerce solutions and replicating ideas that worked in Western markets. But today, they are tackling a wide-range of categories and opportunities and building some solutions that have not been attempted in any other market, he said.

Tracxn’s analysis found that lodging startups raised about $1.7 billion this year — thanks to Oyo alone bagging $1.5 billion, followed by logistics startups such as Elastic Run, Delhivery, and Ecom Express that secured $641 million.

176 horizontal marketplaces, more than 150 education learning apps, over 160 fintech startups, over 120 trucking marketplaces, 82 ride-hailing services, 42 insurance platforms, 33 used car listing providers, and 13 startups that are helping businesses and individuals access working capital secured funding this year. Fintech startups alone raised $3.2 billion this year, more than startups operating in any other category, Tracxn told TechCrunch.

The investors

Sequoia Capital, with more than 50 investments — or co-investments — was the most active venture capital fund for Indian tech startups this year. (Rajan Anandan, former executive in charge of Google’s business in India and Southeast Asia, joined Sequoia Capital India as a managing director in April.) Accel, Tiger Global Management, Blume Ventures, and Chiratae Ventures were the other top four VCs.

Steadview Capital, with nine investments in startups including ride-hailing service Ola, education app Unacademy, and fintech startup BharatPe, led the way among private equity funds. General Atlantic, which invested in NoBroker and recently turned profitable edtech startup Byju’s, invested in four startups. FMO, Sabre Partners India, and CDC Group each invested in three startups.

Venture Catalysts, with over 40 investments including in HomeCapital and Blowhorn, was the top accelerator or incubator in India this year. Y Combinator, with over 25 investments, Sequoia Capital’s Surge, Axilor Ventures, and Techstars were also very active this year.

Indian tech startups also attracted a number of direct investments from top corporates and banks this year. Goldman Sachs, which earlier this month invested in fintech startup ZestMoney, overall made eight investments this year. Among others, Facebook made its first investment in an Indian startup — social-commerce firm Meesho and Twitter led a $100 million financing round in local social networking app ShareChat.