It is beyond doubt that the outbreak of this pandemic has altered every single aspect of life and the reason this event is unique when compared to previous catastrophic event is because it has affected the entire world and created global repercussions. The response to this pandemic has unequivocally tested the patience, resilience and grit of people globally.
This outbreak and the resultant lockdowns, collapse of supply chains, unavailability of resources and the overall uncertainty has created an interesting and impactful shift in the startup ecosystem and its most critical element - raising capital. In India, we are now progressing remarkably on the vaccination drive and though we are returning to pre-covid normalcy, my belief is that some of the trends that emerged in the fundraising paradigm are here to stay.
Some of the long-term trends observed across the food startup investing space (in our opinion) are stated as under -
Deeper focus on cash flows - Growth versus sustainability of cash flows has always been a perplexing decision for growth hungry startups and its investors. However, the pandemic has given birth to a renewed focus on cash flow generation and minimisation of cash burn so that the startup has enough reserves to survive challenging times. On that note, it is advisable that entrepreneurs build a growth trajectory that accommodates stronger unit economics, lower operating costs and generating sizeable cash flows to maintain adequate reserves post re-investments.
Competitive entry point and discovering the intrinsic value of the business - One recurring phenomenon that was observed during the pandemic and continues to happen, is raising capital at lower valuations compared to earlier rounds. A primary driver of this activity has been the cash crunch faced by actively growing startups, which compelled some startups to raise capital with a sense of urgency, leading to dire consequences for the overall value of the companies. As a result of discounted valuations, there is a visible movement in valuation models & determination of business’ intrinsic value. Both institutional and non-institutional investors are now putting in greater diligence when it comes to determining the right entry point (from a valuation perspective) and factoring in higher sensitivity in the financial projections, multiple exit scenarios & different timelines to calculate a robust return profile
Integration of technology & role it plays in streamlining operations is critical - It is a known fact that technology has reigned supreme during this unfortunate time and it has proved to be an indispensable insulation by minimizing the repercussions of this pandemic. That being said, there is a slightly erroneous notion that investment interest is deepening only in deep tech or heavy tech businesses. In my humble opinion, the role of technology has become extremely clear because of the outbreak of COVID-19 and more importantly, it has accelerated the pace at which organizations are now adopting technological advancements across the business.
What this translates into when it comes to fundraising is that the investment interest & intent runs high where technology is playing a critical role across business functions as much as feasible and viable. To make it clearer, it could be any business function including supply chain, recruitments, financial control, marketing etc. that can integrate technology in order to scale faster and manage operational costs but not at the expense of product/service quality, customer experience, employee satisfaction etc. It is essential that founders understand the significance of building automation in operations (on the back of workable technologies) and create scale faster along with a healthy income statement.
“Every crisis represents an opportunity”. True to this statement, this unfortunate & catastrophic event has given rise to multiple opportunities, which are becoming potential candidates for raising capital and building a robust & resilient business. At the cost of sounding repetitive, the parameters to investing in emerging startups have definitely undergone modifications but the paradigm remains the same - investing capital in businesses with a strong moat & sturdy execution capabilities.