India's startup founders are opting for money in the bank instead of high valuations as they look to survive this pandemic

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India's startup founders are opting for money in the bank instead of high valuations as they look to survive this pandemic
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  • While some startups in sectors like edutech, health tech, gaming, and more continue to see soaring valuations for their businesses, that is not the case for many other small companies.
  • Startups are now also turning to angel investors to raise money at the same valuation as their last round.
  • With the coronavirus crisis, securing funding to survive becomes more important than actually looking at metrics like a valuation.
With the coronavirus pandemic, most of India’s small startup founders are scrambling through month after month to survive the crisis. According to a report by Local Circles in June, only 16% of startups and SMEs had enough cash to get through this pandemic.

According to Tracxn's India-Tech Semi-Annual Fact Sheet, the Indian startup ecosystem has seen the worst first half (H1) funding in three years. In the first six months of 2020, startup funding has fallen by 29% – from $5.9 billion in 2019 to $4.2 billion this year.

While some startups, which are in sectors like edutech, health tech, gaming, and more continue to see soaring valuations for their businesses, that is not the case for many other small companies.

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And in times like these, securing funding to survive becomes more important than actually looking at metrics like a valuation.

“In the current environment, for startups the funding is now all about survival. So they want to quickly close the rounds to extend their runways and are not worrying so much about valuations,” said Bhaskar Majumdar, Managing Partner, Unicorn India Ventures.

Startups are now also turning to angel investors to raise rounds at the same valuation as their last round. Ankur Mittal, Co-founder, Inflection Point Ventures, said startup founders are aware of valuation dip, given the pandemic hit on their business. And hence by turning to angel investors, they don’t risk too much dilution as well.

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“With the understanding that it may not be the ideal time to raise next big round with recent financials and growth taking a hit because of what can be termed as a black swan event, to keep the business viable, many founders are approaching angels / angel networks to raise only a small amount at previous round valuations or convertibles at discount to next rounds ensuring the viability of the business without risking too much dilution,” said Mittal.

There's money available, but only for a few

Microsoft for Startups’ Lathika Pai, in an earlier interview with Business Insider, said that while startups might have got a better valuation six months ago; the quality of money is also greater now.

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And that is true as the likes of Sequoia, Lightspeed, and Chiratae have all raised fresh rounds to pump money into India’s startups. While the likes of Google, Facebook, and Microsoft, have set eyes on India’s burgeoning tech ecosystem.

But the larger pie of funds will go to businesses that are already doing well or are backed by notable VCs already. “VCs are preserving cash for their portfolios. Although new deals are also happening but only if the company is really extraordinary. For average deals, valuations are suppressed,” said Majumdar.

So, for founders who are in the initial stages of their journey, it seems crucial to take the cash available and be rational about the valuations that come with it. “Even during the Great Recession of 2008 in the US, startup valuations across each round for the next year had reduced by 30% on average from the previous year. But in the long run, for good businesses run by good founders, getting the right valuation is not a challenge,” said Mittal.

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