It has been almost 5 months since the world is engulfed by the chaos created by COVID-19 with everyone hoping for this pandemic to end. In contrast, the pandemic is getting wider despite of all precautionary measures, forcing authorities to realize that corona virus may never go away and we may have to live with it. We don’t know how far the effects of this cataclysmic event would stretch but its current repercussions have led to an economy that is taking a turn for worse. Public markets are taking a disappointing turn, dry powder is evaporating, and unemployment is rising, and so on.
These circumstances have especially been challenging for young businesses such as startups who are desperately seeking funds in this time of turmoil. To understand how startups can survive this crisis, this article will cast light on funding opportunities and investment scenario both at global & local level so that startups can adapt and react accordingly.
Few years back, in 2016-2018, the Global startup scenario was witnessing a boom creating almost $3 trillion in 2 years but now it is facing a harsh hit due to the emergence of the current corona virus pandemic. According to a report by Startup Genome, a San Francisco-based innovation policy advisory and research firm, global venture capital funding has seen a drop of 20 % since the emergence of this crisis with younger startups facing greater risk of facing a cold shoulder from venture capitalists [VC].
The same report says that 4 out of every 10 startups with 3 months or fewer cash runway will be weeded out if they are unable to raise capital or increase their revenues. This double whammy of revenue fall and capital crunch is keeping startup founders awake at night. VC’s are told by their limited partners to pull back funds, forcing startups and small businesses on the brink of forced closures.
If we look at China which was the ground zero of the crisis, we see that venture funding has seen a sharp decline of almost 50% relative to rest of the world in a matter of just few months. Although China is in its early recovery phase and its experiencing a rebound but still it has long way to go to come back to pre-pandemic levels. Not just China but other Asian startup ecosystems has also faced major decline in funding activity with no rebound as of March (Source: Startup Genome Report). The European startup ecosystem is also no different and it has also seen a sharp drop on funding activity since it became the epicenter of the pandemic.
Before corona virus took the world into its claws, Pakistan’s startup ecosystem was doing quite good with startups raising over USD $32 million worth of capital in just 2019, according to i2i’s Pakistan Startup Ecosystem Report, 2019. However, the emergence of the current pandemic has changed the atmosphere of Pakistan’s startup ecosystem forcing businesses to halt operations, lay off employees and cut their burn rate. Few sectors like travel/transportation business, hospitality business, and restaurants have especially taken the harder hit. As mentioned earlier, startup Genome’s research estimates that global VC investment will see a decline of up to $86.4 billion in global VC investments in the coming year. This global occurring will have even greater repercussion for a developing country like Pakistan whose startup ecosystem is just in its infancy.
In the current situation, venture capitalist are more careful in making their investment in Pakistani startups as they don’t want to spend their money in keeping struggling startup afloat. According to a survey conducted by i2i’s Insights team, 42% of the surveyed startups have a cash runway of only 1-3 months while VC are looking out for companies with at least 18-24 months of runway. This tells us that VCs are only going to back the winners, now in an even more concentrated way. They will be more focused on using their funds in taking care of their existing portfolio and their active pipeline while putting new investments on hold until things get clearer.
Recently, National Incubation Centre [NIC] conducted a web conference of various local and foreign investment moguls. Those venture capitalist expressed that currently they are trying to understand Pakistan’s local environment and most of them have an opportunistic outlook with focus on investing in only those startups that have lengthier cash runways and which are related to businesses that are seeing high demand right now. Khailee NG, managing partner 500 startups, said that his firm has made investment in Pakistani startup ‘Dawai’ earlier and right now is going at Pakistan as a learner in order to evaluate how things turn out in the current circumstances. This tells us that investors are re-strategizing and making changes in their investment approaches in adaption to the current Pakistan startup atmosphere.
In the current circumstances, it’s very natural for startups and small businesses to get pessimistic and consider their future bleak but it’s also a fact that many star companies also have emerged from similar crisis in the past. More than half of Fortune 500 companies emerged from a bearish economy. Even if VCs are reluctant in investing in new startups right now but once this crisis is over, VCs will have all this fund available for the companies who weathered the storm. Even during this crisis, there are many sectors which are seeing an upswing like Ed tech, Tele-medicine, communications, e-tailers, etc. Faisal Aftab, managing partner Lakson Venture Capital, says that their firm has substantial dry powder as they have only deployed 20% of their fund and they are looking out for making investment in startups related to Ed Tech, Health Tech, and Digital payment solutions. Beau Seil, managing partner Patamar Capital, also said that they are ready to make investments in businesses that are being disruptive in the field of financial inclusion, online education, Tele health and other digital businesses.
However, startups who are looking out for funds in 2020 are advised to avoid getting VC’s money because of receiving poor valuation owing to poor negotiation position. Instead, their current focus should be at minimizing their burn rate and prolonging their cash runways as long as possible in order to survive. In the aforementioned NIC Web conference, Khailee NG also expressed that it’s quite weird to think that one can’t make business without VC’s money. He advised startups to go for bootstrapping and self-funding in order to face the current crisis. He believed that companies should try to last it out and make it out to that period of growth that always comes after a bear market.
Those startups who still want VC money or who are in the midst of an investment deal shall make sure that they understand their stage in life cycle, their burn mechanics and must have a strong cash runway if they aspire to get succeeded in getting funds from them. In order to get VC on board, they must also share their business continuity plans on how they are planning to weather the crisis and what are their projection for 2021. Even if the company is not very profitable at the moment, startup can convince VC of being on the path of profitability by showing their incremental growth over past few weeks. In the NIC video conference, all the investment moguls eagerly mentioned that startup should also make sure they do some homework before approaching VCs, looking at VCs’ existing portfolios, i.e. in which sectors they have interest and is your company in that sweet spot or not? Performing all these actions will brighten up the chances for startup to get funds from Venture capitalist even during these uncertain times.
Lastly, whether you as a startup founder go for self-funding or VC monies, you should use this crisis as an opportunity to make your business customer-centered. Perform social listening, understand how customer preferences and buying behavior is changing and figure out the actions you can take to adapt yourselves to changing trends so that you can capitalize on the opportunities this crisis is silently providing. It’s a sure thing that those who are going to adapt and adjust their product/services to the emerging trends will fare better during and after the crisis. For instance, Dawai originally an online pharmacy is now also performing Polymerase Chain Reaction based COVID-19 test with results within 48 hours. Similarly, a Lahore based startup; Conatural, has shifted its manufacturing to sanitizer products and is now seeing high sales demand for its hand sanitizer.
On the basis of all this, our final thoughts are same as that of Faisal Aftab, managing partner at Lakson Investment Venture capital, that startups should utilize the opportunities the current time is providing, adapt their products to solve today’s’ problems and capital will automatically flow in.