Fund Raise by Start-ups – Is this the right time – My thoughts
It is my belief that fundraises will always be relatively easier for good companies with great founders and management teams, that have built a sustainable and differentiated value proposition and are agile to adapt to the situation. I believe that such franchises will always be in demand both in public and private markets.
Approximately half a billion US Dollars were infused in the start-up space over the last month (for reference, the period between 15th June to 18th July 2020). Almost 60 % of this went to three start-ups i.e. Vedantu, Policy Bazaar, and Zolo Stays.
Some interesting facts about listed stocks:
- 5 of Nifty 50 companies
- 8 of Nifty Midcap 150 companies
- 18 of Nifty Small Cap 250 companies
are trading at their 52-week highs
Some facts about the indices themselves:
- Nifty 50 is still 10% down from its peak (It should be noted that in Nifty’s journey from its close price of 7610 on 23-03-2020 to its close price of 11162 on 21-07-2020, Reliance has made a contribution of ~38% towards this 3500 point rally)
- Nifty Midcap 150 is 15% down from its peak
- Nifty Smallcap 250 is 25% down from its peak
Here is what has happened during the last 4 months since March 20:
Nobody could predict the impact of COVID on the economy as this was a once in 100 years phenomenon and was much worse than the world has ever seen as most countries went into lockdowns. There was pessimism and scare all around. In such a scenario, survival instincts and fear came into play.
Given the uncertainty and volatility, most start-up investors pulled back on their commitments to assess the situation of their existing Investee companies. The severity was such that, quite a few companies’ revenues got completely wiped out. Founders of companies, some of whom were on the cusp of raising money were disheartened and took a couple of weeks to come out of this shock.
Most founders with never say die attitude worked towards finding solutions and figured out ways to increase runway, created different use cases for increasing revenues, optimized costs, invested time in making businesses and processes more robust and over-communicated with stakeholders. Speed and agility supported by technology have again brought back optimism in the founder fraternity.
In my portfolio of 25 companies despite a few of them having lost revenue in excess of 50% from pre-COVID levels, there is none that is expected to shut down and the morale of almost all founders and their team is very high.
Here are certain data points that make me believe that a good company will get funded even though there may be some ups and downs and additional shocks from COVID:
- There is enough dry powder sitting on the fence to be invested by investors.
- Based on my understanding, most good companies have been able to raise money at a higher valuation in the past one month.
- Reliance has created a lot of excitement with both international investors and businesses outside India Making start-ups as an important pillar of their strategy has also helped.
- Interest rates globally are likely to remain low, therefore people will start to look at higher yields.
- Most central banks are expanding their balance sheets to support the economy, some of this money will find its way to companies in both listed and unlisted space.
- Fear of the second wave of COVID and delay in getting a vaccine.
- The economic fundamentals have further weakened.
- The liquidity crisis continues as not enough credit transmission is happening to the affected sectors despite enough liquidity support offered by the government.
- There may have been much better than expected growth in June, but there are doubts if this upward trend is sustainable.
- Global GDP may contract based on different estimates being provided by various agencies. India’s de-growth estimates vary between negative 5-9%, even though my personal view which I have shared in the past is likely to be closer to 15% or higher unless the government steps in to create demand.
In conclusion and based on the facts above, I do expect founders should continue to build a business with good outcomes for all stakeholders and money will follow. They should just enjoy the journey of creating a Purpose and Values-Driven business for the benefit of all stakeholders in their Ecosystem.