Startup funding could halt, valuations to take a hit and business models have to be pivoted say investors

• With uncertainty around the world, the bustling startup ecosystem in India too will have to face the wrath of the virus.
• With the lack of clarity regarding the full extent of the crisis, economic disruption is a consequence of the unprecedented health crisis.
• Some startups could shut shop, and many others will have to tweak their businesses to stay afloat.

The Coronavirus pandemic crashed stock markets around the world, productions have come to a halt and businesses look at a bleak future with little or no fear of running for months with no revenue. As uncertainty builds around the world, the bustling startup ecosystem in India too will have to face the wrath of the virus.

Investors will now be cautious with their moves, while some say funding could soon come to a halt. During these unprecedented times, investments into startups will be a challenging task. Investors believe that this is a time to rethink strategies and re-evaluate how they want to move forward.

Funding could come to a halt, valuations could change

With the lack of clarity regarding the full extent of the crisis, economic disruption is a consequence of an unprecedented health crisis, believes Ishpreet Singh Gandhi, founder and managing partner at Stride Ventures.

Gandhi also said that current valuations could be difficult to justify in the funding rounds of the future rounds. “Capital will flow more towards startups with robust proof of concept and institutional backing,” he said.

But investors are also hopeful that things could soon change. “As things settle down, a bit of funding should resume as there is a lot of dry powder that needs to be put to work. Investors generally understand that growth will sputter for the majority of their portfolio and so will outside funding, so they will work with cos to increase runway and also support with capital to ride through the situation,” said Deepak Gupta, founder, WEH Ventures told Business Insider.

Founders will have to tweak their businesses

Unforeseen times also call for unforeseen measures. With the coronavirus pandemic, there are many startups that will have to change their course of work. A survey by Indeed says that 64% of Indian businesses are pivoting in response to pandemic.

And investors who are all on board and helping out their portfolio companies deal with the crisis, have sent out a clear message - pivot if your idea doesn’t fit the bill.

“Founders have been asked to tweak their business plans to ensure sufficient cash buffers due to lower than projected sales growth and slowdown in the funding environment. Portfolio companies as well as investors are conscious of the fact that implementing work from home policies may slow down their turnaround time, but these policies are essential to ensure that team morale and health are not affected over the course of the next few weeks,” Venkat Vallabhaneni, managing partner at Inflexor Ventures told Business Insider.

Cashburn is not an option anymore

Most of the sectors except for food, e-commerce and edtech have been severely affected. Many of them are seeing zero revenue right now. Even if they have revenue, they have no supply chain or the ability to deliver.

Keeping this in mind, entrepreneurs will have to face the bitter truth – they might have to let go of some employees too. Vani Kola, managing director of Kalaari Capital told Business Insider in an earlier interview that this is a kind of planning no one has ever thought of or prepared for.

“So it’s just a question of runway and cash flow and ability to keep their lights on and pay their employees. Many countries are caught in this vulnerable situation. Though their underlined business premise may still be true, it may take capacity to stay in the market for 6-9 months with severely reduced revenues and not every startup has that kind of a cash cushion to be able to ride the market,” she said.

Investors are hopeful for ‘business as usual’ to return soon

Investors are taking this time to extend their resources and expertise to founders. But many are also taking advantage of their backup support to help startups.

Anup Jain, managing partner, Orios Venture Partners believes that investments could be delayed because the due diligence process requires boots on the ground from teams across the investment firms.

“Having said that, we do not think that there will be an investment slowdown at the seed stage in this current situation, unless we see the spread grow further. We are facilitating back up support to our portfolio in case there is a funding holdup from an incoming investor at Series A,” said Jain.

For some, work goes on as business as usual. Mumbai-based early stage fund house Unicorn India Ventures has announced the first close of its 2nd equity fund at $12 million. The second equity fund of $53 million was announced last year.

“The investment would happen as it is, just the deal size and valuation may see some correction. The investment cycle may get longer due to lock down but overall we don't see sentiment going down, this is a temporary phase which will pass,” said Anil Joshi, managing partner, Unicorn India ventures.

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