The past year has been a roller coaster for all businesses, with the economy worldwide coming to a standstill in the first few months post the coronavirus outbreak. Several industries, especially the travel and hospitality sector, had to cease operations. The capital was scanty in the first quarter of 2020, leading to several companies shutting their operations.
At the same time, sectors such as edtech and gaming also got a fillip. The Indian government’s support to ‘Local for Vocal’ boosted Indian businesses and offered them an opportunity to expand and experiment.
The situation with the funding is gradually improving now. Investors backed startups with additional capital who have acted with purpose. Several reports indicate that 60% of the startups funded in 2019 were in the early-stage in contrast to the later growth stage. However, in terms of value, it only amounted to a total of 10%. It was increased to 16% in 2020 (1).
A plausible reason for the surge could be the slowing down of the company’s growth plans in late-stage startups, which would have required additional investments if implemented.
Public markets have also shown enthusiastic reactions to well-executed startups. We have witnessed businesses supporting one another in their respective niche in ways that may have been still at the ideation stage if it wasn’t for the coronavirus pandemic. For instance, OTT proved to be the way to release new movies in the absence of theatres (2).
Venture Capital Community in 2020
The market experts suggest that 2020 has shown the excellent time lag effect and changes forced by the coronavirus pandemic. Businesses focused more on preservation than growth.
With some indication of the world coming back to normalcy, which is further aided in no less measure by liquidity infusion by governments worldwide, investors have started re-evaluating new investments. The past year has seen more than 765 funding deals, out of which about 655 were unique (3).
Even though the total funding amount clocked in the Indian startup ecosystem was 30% less than the previous year, it was still equivalent to the amount secured in 2015. In the country, venture capital investments surged to 3.6 billion USD in July to September from 1.5 billion USD in the June quarter.
How VCs Work?
As the Indian startup ecosystem is gradually growing, big enterprises and wealthy individuals find profitable companies to invest in and earn returns. These sources pull in the fund and build a venture capital, managed by a company that makes a portfolio, invests money in startups on behalf of them, and intervenes in the startup’s growth strategies to secure returns.
Entrepreneurs utilize the VC investment in the startup to grow, expand, reach profitability. Then it either goes for an IPO or goes for a merger or acquisition. As these deals happen, the VC company cash out the returns for the investment made at different business stages.
The actual fundholders and the limited partners get returns from the money they offer for investment while the VC firm earns the excess profit. And of course, all these would only succeed if the investors make the right deal and the startup effectively utilizes the fund to achieve stable growth.
VC companies have LP, Limited Partners at the most superior level, who offer the fund out of their money and earn returns from its investment. GP, General Partners, manages the fund accumulated and builds the investment portfolio finalizing deals with selected startups at the next level. They also have a say in the business strategies of the startups. For these, they earn management fees and carry interest from the share of the startup profits (4).
At the next level are the associates, who are the deal makers. They are in charge of maintaining relationships with the founders. The lowest level is analysts who observe and analyze market, startups, and budding entrepreneurs with stable growth trends and potentially high returns to select where to make a capital investment. And to sail through these, entrepreneurs need a thorough knowledge of securing a VC fund.
The Process to Seek VC Funding
Ideally, startups need to do a bit of homework to find VCs interested in their sectors. The process starts with a good elevator pitch, basically a succinct, crisp description of the problem the startup is trying to solve and how it will solve it.
‘If one can’t explain something in simple terms, one doesn’t understand it.’ – Richard Feynman (5).
It then needs a strong investor pitch deck elaborating the idea, team, market, revenue potential, etc., backed by data. One of the essential parameters here is the ability to eliminate the risk associated with the venture – better the skill, higher the company valuation (6).
Startups also need to include information such as a business proposal that solves real-world issues, a prototype of the offering, proof of customer market fit, and customer response. Most importantly, startups also need to show their conviction to pursue the business idea, the mettle for execution, and to sustain the VC interest throughout the process.
Striking the Right VC Funding Deal
As venture capital companies look for higher returns from the deal, startups have a higher probability of failure in their initial years. Hence, it is essential to gauge the arrangements properly. Several steps, such as market surveys, and background checks, are involved before finalizing venture capital deals and investment.
Striking a good deal with the right VC firm or investor needs the entrepreneur to have tactical knowledge, a thorough market study, and knowledge about the right ways of attracting investors into the deal and excel in each.
Selecting the Right VC Firm
When raising VC funding, the top-rate concern is picking the right VC firm. And entrepreneurs need to do a market study to do that. They can start by checking the available VC firm options and find one with expertise in the niche industry so that it can offer a suitable mentorship.
Consider this, to survive and expand in the constantly evolving market, a startup needs to remain updated with the industry’s latest. It includes new technologies, emerging innovations, and industry status. Hence, only a VC firm with ample knowledge in the field would guide the startup towards sustainability and higher profit.
Moreover, the VC firm would also govern the fund utilization and also have a say in the startup’s business strategies. Hence, the investors must have a vast knowledge and clear understanding of the industry. Therefore, while making the decision, the founder needs to consider the VC firm’s abilities.
The Right Impression
The founder needs to convince investors about the startup’s potential to ensure funding for his business. It also includes a growth path, clarity on strategies, business goals, estimated time to make profits, and general returns. All of these needs to be established well in the business plan.
Moreover, the presentation in front of the investors also needs to be well-structured, impressive, supported by required data and documents to make a strong appeal. Thus, the founder also needs to make an excellent business pitch, and present a unique and exciting idea, with all the relevant data, correctly defined growth path, clear business strategies, target, and business goals – all of these need to be striking enough to attract investors.
The Right Timing
Once the pitch is ready, the next step is to approach and persuade the associates and analysts of the VC firms to fix the meeting with the GPs for the deal to make them interested in making the investment. The final step is to convince GPs and LPs to close the deal and get the VC fund with an impressive presentation and business plan.
Safeguarding Sensitive Information
While convincing VC investors for funding, entrepreneurs need to be very careful about what information they need to share with them. If the deal is not finalized, the information and business idea’s spread can be harmful to the business growth and market penetration. Moreover, in VC funding, the investors would get hold of the company’s equity, thereby having a say in business decisions and insider information access. Hence, the founder needs to practice healthy safeguards.
Things to Keep in Mind When Seeking Funding in 2021
Trust is an essential factor that determines the relationship between a VC and a startup. Hence, both parties must be on the same page when it comes to expectations and responsibilities. VC firms mainly look for budding entrepreneurs who can prove their potential and back their claims with relevant data. It also includes whether they can showcase the required skills and knowledge to deliver them (7).
Here is a list of things from the investors’ view to keep in mind while seeking VC funding in 2021.
- Clarity on Founder’s Objectives and Motivation: entrepreneurs need to have a thorough knowledge of the industry gap they are trying to fill. The more clarity an entrepreneur has regarding the problem he is trying to solve, the easier it is to convince investors and make them believe.
- Understanding the Core: It doesn’t mean knowing only about the product but everything about the business – its core and bandwidth and time spent by the team on primary and secondary problems.
- Belief in the Product and Yourself and the Team: Know the startup’s motive and why it would be successful. Know about your strengths and how to utilize them fully.
- Management, an Essential Part of Any Business: There needs to be communication and coordination between team members. The relationship between the core and founding team must be good.
- Defensibility of the Business Model: One must know how good a chance one stands against the competition.
Startup Funding Trends in 2021
With the hope that the coronavirus pandemic situation would be contained and get better from here, the year 2021 promises to be a good year for funding new startups. Venture capitalists can be more optimistic about experimenting with sectors and funding. Infusion of significant liquidity through the global financial system offers the needed financial stability that we ask for before proceeding with the decision to make an investment.
India has also witnessed venture capital funds securing fresh capital in the past year, which could be deployed in the current year.
Here are some possible investment trends that could turn into the flavor of 2021 (8).
- D3C firms, especially in the ‘good for you’ sector, should continue to allure capital.
- With the surge of new brands, pre-purchase assistance can be an exciting category.
- Impetus by the Indian government on digitalization should also offer exciting opportunities in the healthcare and fintech industries.
- Rising awareness towards sustainability and reducing the carbon footprint would also offer fillip to electric vehicles, startups providing clean water, air, and optimizing energy solution startups.
Here are some most prominent startup and VC trends that would come to the fore in 2021.
The ‘War’ of Productivity and Collaboration
According to Interbrand, four of the top five most valuable brands worldwide are platforms, Apple, Microsoft, Google, and Amazon. If one adds Salesforce, arguably, these companies will set the world’s tech agenda for years to come.
“No matter the industry, today, it is not enough to produce and sell great products. One also needs to build a community and a marketplace that allows users to transact, interact, and learn from one another. That’s the power of these platforms.” – Tien Tzuo, the CEO of Zuora (9).
When it is combined with remote or hybrid working (10), it has increased the demand for the workplace, productivity, and collaboration tools.
Read Also: Is Slack a Key to Adapt to the New Normal?
We do not doubt that we would see a new wave of innovative players in the space in the upcoming months. Glue, a new platform of Memory, is one to watch out for.
Global Supply Chains Under Strain
There are only specific segments that are put under as much stress in 2020 as supply chains. However, the situation has only accelerated a transformation in companies looking to reduce the disruption risks amid geopolitical uncertainty and economic populism. It represents an opportunity for VCs and startups.
While there are supply chain tools, they are relatively slow to maximize the latest technologies, including AI, artificial intelligence, IoT, the internet of things, and data analytics.
2021 is likely to observe several supply chain startups making their markets with solutions that reduce waste, streamline ordering, and highlight risk areas. Watch out for Contingent, which utilizes AI to increase compliance and lessen fraud, and Krizo, which is creating an end-to-end solution for resilience, and the capability of handling everything from business continuity, crisis management, and mass communication.
Drive Competitive Advantage with Data Ethics
With increasing internet penetration and increased time spent online, protecting privacy and data has become critical. As India is yet to develop its data protection law, consumers are expecting companies to go above and beyond to safeguard their data.
Google has already pre-empted the privacy legislation and stated that it would stop using third-party cookies in Chrome by 2022 (11). Throughout the year, we will see more companies following the suit by integrating data ethics into their brand to foster trust among consumers and develop a competitive advantage.
The Banking Uberization
Fintech players have been challenging big incumbent banks for years. However, 2021 could be a watershed considering the rising number of non-banks joining the fray.
Uber is leading the way as it regains its focus on finance with Uber Cash’s rollout (12). And we believe that it would be alone. The so-called BaaS, Banking-as-a-Service, would be one of the most crucial trends of the year. The companies with innovative tech infrastructure increasingly target non-banks in the shape of platform business like Google, e-commerce giant Amazon, and other telecom companies (13).
Moreover, these BaaS providers also have a market among other fintech and incumbent banks to help them innovate their offering without the investment and time of developing their platforms. Hence, BaaS providers are a good bet for investors.
Read Also: Indian Fintech Sector Set to Evolve in 2021
The Back Office Bundling and Unbundling
Like the fintech sector, several other segments have also experienced cycles of bundling and unbundling related services and products over the years, driven by new innovative startups and emerging technologies.
For instance, the media industry was unbundled in the 2000s as user-generated content platforms such as YouTube and new music formats such as MP3 came to the fore. However, it is now being bundled again in media giants such as Spotify and Netflix (14).
We will see these cycles or bundling and unbundling become even more rapid, dynamic, and unpredictable in 2021 and beyond.
In conventional sectors like financial services, incumbents rely on bundling via API, adding the best products, tech stack, and features as they look to catch up with the digital world. We will also see more bundling of back-office processes, allowing companies to offer seamless consumer experience, reduce costs, and lessen the operational risks associated with an antiquated and manual system.
For instance, businesses can bundle innovative credit assessment solutions onto their offerings via companies like Duedil (15). Or, choose to seamlessly integrate a way to offer payment terms for B2B customers via solutions like Hokodo (16).
The Need for Speed
5G has been on the drawing for the board for some time. However, it has now become a reality with the rollout of 5G networks underway worldwide. An Ericsson report predicted that it would cover about 60% of the global population by 2026 (17).
The technology not only offers faster connection speeds and more capacity. It also provides ultra-low latency; it is transformative for IoT, and edge computing, and anything that needs real-time, instant connection, like autonomous cars, robotic surgeons, and machine-to-machine communications, like drone fleets (18).
It would also significantly impact AR and VR experiences in media, gaming, and entertainment and contributes towards even more seamless remote working. VCs and startups must watch the space for numerous use-case seeing the daylight of the year.
Challenges for Entrepreneurs
Every step in a business has its share of challenges, and venture capital funding is not an exception. The VC funding also comes with other things that need to be careful of as well.
Initially, since securing a VC fund for companies comes with making a certain level of return conditions, the VC firm has a say in the company. Entrepreneurs require to gauge their abilities to make profits and the pros and cons of losing business decisions autonomy and being accountable to the VC firm (19).
The investor’s access to the business’s insider information is another big challenge. Sensitive data getting revealed in the market can reduce the company’s success rate, and it can also lead to a business failure. Additionally, it is also highly harmful to the startup’s reputation, image, and branding.
Moreover, when it comes to securing venture capital funds for entrepreneurs, one requires a proper background check and market survey of the VC companies and investors about their investment conditions, credibility, success rates in terms of experience level and exists in funding startups.
It is essential to finalize the VC firms and investors to approach and mandatory if founders wish to secure venture capital online as a bad deal can get them into a soup. Moreover, the country is also in the middle of a liquidity crisis, making the situation more difficult and complex for startups to succeed and earn higher returns (20).
Over-ambitious and stringent conditions of venture capital investment can add to the troubles for startups instead of helping.