The challenging macro environment is set to throw up pockets of opportunities for startups and investors, and funds despite tightening their purse strings will be keen on bargain-hunting for innovative and disruptive technology ventures, according to industry experts.
Early-stage funds will keep a watchful eye on key metrics like path-to-profitability, team and governance, cash flow cycles, and debtor days and guard against over-dependence of ventures on a single client when making investment decisions, experts said while speaking at an investor panel during TiECON Pune 2022 ‘Future Achievers Conclave’.
“In these tough times, tech is a big enabler for improving profitability or enhancing the ability to drive revenues. We do see better adoption of tech by enterprises and expect some of our portfolio companies to do even better in these difficult times,” Abhishek Prasad, Managing Partner of Cornerstone Ventures (CSVP Fund), said during the panel discussion.
Anil Gudibande, the co-founder of 1Crowd, said it is ‘back to basics’ for many funds, and that some of the better outcomes are expected from their deep tech investments.
1Crowd is an equity crowdfunding platform, focused on connecting investors with Indian startups and early-stage ventures, with an array of capital solutions and co-investment commitment.
For a startup, with a promising business idea, 1Crowd not only helps raise capital but also provides access to a pool of mentors and partners who can help nurture the business to its potential.
Nidhi Saraf, founder and CEO of Key Venture, while speaking at the event, noted that evaluation metrics and rigour have changed, and startups, which are merely replicating services or products, will find it difficult.
“Tough questions are being asked, and plain vanilla model or just replicating a service is no longer acceptable,” Saraf said.
The irrational exuberance and quick term sheets that followed investment decisions will be replaced by greater rigour and scrutiny going forward, amid growing apprehension over ‘funding winter’ or downcast investor sentiments towards funding startups.
According to the panellists, technology that fuels non-discretionary consumer spending, disrupts markets, or yields cost savings and productivity for enterprises will be attractive.
The comments come at a time when investments and venture capital deal volumes in the startup space have started to taper as global investors turn wary of committing large cheques amid uncertain market conditions.
After a dream run and heady valuations in the past years, the wave of venture capital chasing the Indian startup ecosystem (the third largest startup ecosystem in the world) appears to be ebbing, mirroring slowdown headwinds in Western markets. Spooked by concerns over profitability, cash burn and corporate governance issues, global investors are raising their guard, while market corrections have taken the sheen off some newly-listed startups.
Creation of value needs to be a priority for entrepreneurs before they worry about valuations, Gudibande of 1Crowd said, observing that investing is a game of patience. Startups that chase disruptive models to address gaps in areas like financial inclusion, education, healthcare and infrastructure will be attractive, besides sophisticated technology for niche applications.
CSVP Fund expects the next few months to yield pockets of opportunities as valuations turn more realistic.
“Given our pre-series A, Series A stage funding, times will get exciting for us. Over the next 12 months, negotiations will be easier and valuations will get more realistic for us,” said Prasad of CSVP Fund, a 50 million dollar fund that has been in operation for about three years with 15 portfolio companies.
