Is this crisis the best time to invest in early stage startups?

The startup ecosystem in India is facing setbacks like every other industry. People of all professions are grappling with the realities of the COVID-19 pandemic. In the immediate aftermath of the crisis, there was significant uncertainty and doubt in the minds of Venture Capitalists and early-stage startups. This was because no country in the world had controlled the virus spread efficiently. On the bright side, previous experiences with health crises suggest how an initial slowdown in funding is compensated with a revival in months following cataclysmic events.

Seven months into the crisis, people and businesses are slowly adjusting to the new realities, albeit with reasonable restrictions. As people accustom themselves to social distancing guidelines and contactless services, startups will need to reinvent themselves. VCs, on their part, are recuperating from the setbacks. They are on the lookout for ambitious teams that have a flexible bent of mind and problem-solving abilities. If the pandemic has taught us anything, it is to adapt and evolve.

Investors and the opportunities they are providing

People have more time at their disposal as they work from home. Thus, this is leading to an increase in consumption of the internet, smartphone usage, and online shopping experiences. The pandemic has ushered in changes in consumer behaviour; those who can tap into it can stand out among the crowd. Customer retention has now become a top priority for several young entrepreneurs. Thus, they are leaving no stone unturned to impress investors about their ability to retain customers during a health crisis.

Early-stage startups that can orient their services as per the changes taking place in the industry are more likely to acquire seed funding. There is a sense of optimism among young entrepreneurs. They believe that the economy will rebound, and opportunities will open up once again. Some sectors are more appealing than others, as demand for essential services will aid their growth. Unprecedented growth in HealthTech and Pharma, IT, FinTech, E-commerce, EdTech industries, etc., is owed to the sudden shift in traffic and demand from offline to online platforms.

Moreover, the shutdown of public places has allowed content providers and EdTech companies to ride the new wave. Teachers and students are taking their lessons online; homework assignments and attendances are taking place via virtual classrooms. Even if the post-COVID scenario might bring the kids back to school, the reticent attitudes of earlier years towards e-learning has now become obsolete.

The thought behind the process and prospects

For VCs and Angel investors, the idea behind investing in early-stage startups is to stay relevant within the changing landscape through minimal and manageable risks. By addressing visible consumer challenges faced by people during the crisis, investors can identify opportunities. They can invest in lower-valued startups, and piggyback on younger entrepreneurs’ ideas; in the hope that it would make them a fortune.

In India’s case, VCs and startup founders are now upbeat about the doors that have opened as a consequence of the ban on hundreds of Chinese-origin social media apps. The India-China geopolitical tug of war is now a blessing in disguise; for those who are providing alternatives to Chinese video-sharing apps. VCs realize the growth potential of Indian-origin apps, with the passion Indians have for video-based entertainment attracting attention from the largest VCs in the world. Immaterial of decline in annual funding in 2020, both investors and entrepreneurs feel that a new-age tech revolution is in the offing.

If investors fuel and capitalize on it, unique innovations might occur.

Furthermore, B2B companies are likely to draw more interest. This is because they are usually less capital intensive and carry low risk. Even though B2C companies could bring rewards, investors will play the waiting game to track the trends during COVID-19.

In the BFSI or FinTech sector, startups that provide B2B services like financial intelligence and fraud detection to banks; Non-Banking Financial Companies (NBFCs); insurance companies, etc are likely to be the point of focus of Angel investors. As scores of people are moving from traditional financing to digital finance, scores of businesses are keen to create a niche for themselves.

The processes are getting speedier, more sophisticated, and reliable, thanks to the competition between financial service providers to provide the best in digital during a pandemic. The brightest minds often shine when they operate under limitations. Therefore, early-stage startups are here to stay, and so are their funding opportunities.