Covid-spooked startup funding may not fully recover this year; majority investors not looking for deals

70 per cent startup respondents claimed negative impact on business due to Covid.

Covid’s impact on startup funding is unlikely to wither away anytime soon. The investments into startups will continue to be impacted over the next six months, according to 92 per cent investors surveyed by FICCI and Indian Angel Network. Out of 27 investors who were part of the survey that included 250 startups and 34 incubators, 56 per cent claimed moderate impact while 40 per cent said there would be a severe impact on startup funding due to Covid. Consequently, 59 per cent of investors going forward would prefer working with startups in their current portfolio until the situation improves instead of working on new deals.

As Covid has led to increased adoption of digital services such as online education among students and healthcare, investors’ preference has also been realigned with the shift in opportunities. For instance, from fintech, health, AI & deep tech, edtech and agri as top-five priority sectors before lockdown have been changed to health, edtech, AI & deep tech, fintech and agri.

Moreover, the response from investors to pitches made by startups before lockdown hasn’t been encouraging as only 8 per cent startups have been able to sign the agreement and receive the funds during the lockdown. On the other hand, 33 per cent startups said that the decision to invest has been put on hold by investors while for 32 per cent startups there is no response from investors. For rest 17 per cent are yet to receive funds while for 10 per cent, the deal has been cancelled, according to the survey titled Impact of Covid-19 on Indian Startups.

“VCs are doing the same thing that angels are doing. Because it is isolation, you are not able to talk to startups. How long and how many deals can you close by connecting online. You cannot move from one building to another. You cannot close deals like that. Also, I know a lot of portfolio companies will miss their growth projections since a lot of cash is diverted to Coronavirus-related expenses. Coronavirus will be one major factor for startup shutdowns or failures in 2020,” Padmaja Ruparel, Co-founder, Indian Angel Network had told Financial Express Online.

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70 per cent startup respondents claimed negative impact on business due to Covid while 60 per cent said they are operating with some disruption. Also, in terms of cash reserves available to pay for fixed costs post lockdown, 38 per cent startups had reserves for 1-3 months only while 22 per cent said to cash reserves for 3-6 months. Only 7 per cent startups had cash for more than a year to bear the fixed cost. Among cost reduction measures, 68 per cent startups have reduced administrative and operational costs while only 18 per cent have sought layoffs.

“The start-up sector is stressed for survival at the moment. The investment sentiment is also subdued and is expected to remain so in the coming months. Lack of working capital and cash flows may lead to major layoffs over the next 3-6 months by start-ups,” said Dilip Chenoy, Secretary-General, FICCI said in a statement.

Meanwhile, startup funding in the first half of 2020 has declined 11 per cent in terms of the amount and 31 per cent with respect to the number of deals from the year-ago period, according to the data from Venture Intelligence. Investors poured $4.1 billion in 270 deals in startups during H1 2020 in comparison to $4.6 billion put in 393 deals during H1 2019. While the first quarter of 2020 was slightly better in terms of funding with investments secured by OYO ($807 million), Byju’s ($200 million), Swiggy (around $155 million), Zomato (around $155 million), etc, the second quarter activity was a bit dull with prominent deals made by Postman ($150 million) and Byju’s (undisclosed amount in June raised from BOND) only.