Indian startups were headed for a good year – and then coronavirus happened

The year 2020 was going to be a great year for Indian startups. Until it was not.

Despite India seeing its first coronavirus case on January 30, startups in the country raised an impressive $3 billion in fresh funding during February – nearly three times more than a year ago – according to data from Tracxn.

“In general we see...$1.5 billion investments per month and February was an aberration [but] March 2020 was surely impacted by freezing of people and economic activity,” according to Yugal Joshi, vice-president at Texas-based consultancy Everest Group.

Before the Covid-19 pandemic tightened its grip around India, things were looking up.

“The [stock] markets had done well and that generated a lot of capital, some of which would have gone into [venture capital],” Kartik Hosanagar, a professor of technology and digital business at the University of Pennsylvania’s Wharton School, told Quartz.

Besides higher funding, the Indian startup ecosystem was also showing other signs of maturity and a healthy future.

A turn for the worse?

The average deal size in the Indian startup ecosystem during January and February was higher than a year ago. For instance, in February, there were 104 deals that resulted in higher investment than what 114 deals in the same month last year had seen.

There was hope that this momentum would continue and the industry would see more of large rounds than small-ticket seed fundings. “We expected more Series A and B deals in 2020,” Apoorv Ranjan Sharma, co-founder and president incubator Venture Catalysts, told Quartz.

But now, much like during the dot-com bust of the early 2000s and the financial crisis in mid-2008, investment firms are focussed on protecting existing portfolio companies rather than adding new ones in a period of crisis. “It is hard for entrepreneurs to even set up meetings with [venture capitalists] and VC firms haven’t yet fully instituted processes to make final decisions without meeting in person,” Hosanagar said.

One such bootstrapped startup, an e-commerce store for pre-owned clothing Kiabza, said one of the VCs they were in touch with said all talks are off. “They have taken a policy decision to not make any new investments till July,” Nohar Nath, founder and CEO at Kiabza, told Quartz.

Moreover, a big goldmine has been compromised: Chinese behemoths. Last year, Chinese investors provided record funding for Indian startups totalling $1.4 billion. Since the pandemic broke out, “international travelling restrictions have also put a halt on fundraising activities as China is one of the biggest sources of funds for the Indian startup ecosystem,” Sahaj Kumar, head of research at VCCEdge, said in an email.

The post-covid world

Certain sectors will suffer more than the others. For instance, travel, hospitality, luxury, retail, and some other consumer-facing businesses will witness a bloodbath, experts told Quartz. On the other hand, there is an opportunity in misery for some others like startups in analytics, artificial intelligence, and health-tech. Ed-tech and online grocery are already booming and could find even more takers.

“The winners and losers are not going to be drawn on lines of larger versus smaller,” Murthy of Lightbox said. “Companies that can conserve cash, invest in product differentiation and meet real consumer needs will be the winners – irrespective of their size.”

It might take a year or more for the industry to get back to some semblance of normalcy, experts said. Even after the dust settles on Covid-19, startup funding has plenty of issues like geopolitical unrest and exaggerated valuations to grapple with anyway, said Sandeep Murthy, co-founder and partner at Mumbai-based Lightbox VC.

“Once we get past the reality of adjusting to a post-Covid-19 world, those original concerns along with new ones will come back to the forefront and keep levels of funding and valuations depressed for some time,” Murthy said.

This article first appeared on Quartz.