The covid-19 crisis has shrunk the investment appetite for startups globally in 2020. In India, venture capital (VC) investments have fallen sharply to $2.2 billion in the first quarter of 2020, according to KPMG’s Venture Pulse report, reflecting the challenging times for startups in the ongoing economic slowdown. While the deal pipeline remains relatively robust in India, deal flow may become slow. Bertelsmann India Investments (BII), the VC fund of Bertelsmann, focuses on Series B and C stage investments in startups in the digital, education, media and services sectors. In an interview with Mint, Rohit Sood, principal, BII, spoke about the investment climate in the country and the impact on international funding amid the pandemic. Edited excerpts:
What kind of a dip did you witness in VC deals during the covid crisis in March-May? Will that continue?
There was an immediate dip in activity towards end of March and most of April, as all investors were figuring out the impact of the pandemic and lockdown on their portfolios. But things have started to pick up in May as there is still a lot of dry powder out there. So far, only the deals in the existing pipelines were getting most attention, now the key question is whether enough investors will be comfortable closing deals remotely. We expect the usual suspects to start picking pace soon but international investors with no or limited teams on the ground will probably delay investments due to lack of travel.
Will India be able to attract foreign venture capital?
The Indian venture capital industry relies heavily on international capital and we believe it will continue to be the case. India has done well against other emerging markets and continues to find allocation among global investors. Over the short to medium term, two things will impact this trend – India’s recovery cycle from imminent recession and investor sentiment towards China. But over the long term, India should be able to attract global capital as long as we deliver on some key reforms.
Do you think deep tech and fintech startups will continue to attract funding, as in the last few years?
Deep tech will continue to attract investments as most business models have enterprise clients and there are tailwinds in the B2B segment. Fintech momentum may slow a bit this year. A large share of fintech investments were in lending space which was already tackling liquidity crisis, pre-covid. While the macro story is still very positive for lending businesses, we believe that investors would want to see how most books perform during these uncertain times over next 2-4 quarters, hence 2020 may be a slow year for fintechs raising series A, B or C. On the other hand, very early stage (seed) companies may see more activity as they are more immune to the very short-term.
Startups in which sectors will attract VC funding?
Ed-tech and gaming will be sectors to watch. They were already gaining steam pre-covid and the lockdown has further accelerated adoption. E-commerce will also have tailwinds as digitization is generally on the rise and shopping in public places will be limited for the next few months. However, consumer sector performance depends on how deep a recession India faces in coming months. Enterprise-tech space should also see a lot of activity as this segment is expected to perform relatively better in recessionary times.
Some Indian startups raised funds despite the pandemic, including Shiprocket, where you are an investor. What have they done differently?
Companies which have executed well over the years and are leaders in the category will continue to attract investments, and at pretty good terms too. There is still a lot of dry powder out there and we can expect some degree of market polarization as well. Due to increased risk aversion, the top assets will attract a lot more capital than pre-covid times and hence, we will continue to see some big deals happening. Shiprocket is only one such example and we are seeing more such activity within our portfolio.
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