We would be living in a fool’s paradise if we fail to acknowledge the fact that the Indian economy has in fact been hit hard by the ongoing COVID-19 pandemic. The effect of this crisis has had a rippling effect and India has witnessed, as has been seen across the globe, a fall in cross-border trade, rise in poverty and unemployment, and disruptions in supply chains including a contraction in outputs. As per the World Bank’s Global Economic Prospects report released on January 5, 2021, there has been a contraction of India’s GDP by 9.6 per cent in the fiscal year 2020/21. However, as a silver lining, it is also noted that India’s GDP is expected to grow at 5.4 per cent in the fiscal year 2021/22 and 5.2 per cent in fiscal 2022/23.
Despite extremely challenging economic conditions due to COVID-19, venture capital investments in India rose during the third quarter of 2020, with a primary focus on highly relevant companies and industries in such times such as the intensely competitive food and grocery delivery sector (wherein Flipkart raised USD 1.3 billion), consumer goods (packaged essentials, personal and healthcare products and food processing), pharmaceuticals as well as sub-sectors like medical supply and services, biotech, agricultural products, edtech, chemicals, and e-commerce.
There appeared to be an upswing in the positive sentiments once the initial tidal wave of doom and gloom due to COVID-19 had subsided. In fact in July of 2020, Sequoia Capital raised $1.35 billion for its new fund focused on investing in start-ups in India, along with Southeast Asia. Similarly, Google announced a $10 billion fund to help accelerate India’s transition to a digital economy. According to the IVCA-EY monthly PE/VC roundup of 2020, private equity/ venture capital investments worth $41.4 billion across 852 deals and exits worth $4.9 billion across 129 deals with open market exits accounting for 47 per cent of all deals by value were recorded.
While private equity and venture capital investors entered uncharted waters and tried to cope with an unprecedented and highly dynamic situation as it was unfolding in 2020, focus on operational excellence, portfolio diversification, collaborative approach, encouraging digital-first models were amongst the top priorities for most start-ups as investors were on the look-out for strong balance sheets, steady cash flows, lower debt levels, and dependable management teams, as investment considerations. One could say that as a gift from above, the consequent economic, financial, and business fluctuations due to COVID-19 encouraged start-ups to adopt a cautious and vigilant approach in the wake of the crisis while finalizing their business plans, revenues milestones, and business targets, especially if the breach of these targets could lead to adverse consequences under commercial and investment agreements. Founders were advised to be cognizant of any past agreed performance obligations in the investment documents and proactively inform the investors of the impact on the metrics measuring the performance obligations (which many investors were willing to consider positively).
In 2020, we observed the deal construct going through a massive change as physical meetings were replaced by virtual interactions, and the significance of due diligence was magnified for closing potential deals. From a deal-making standpoint, there were several elements investors emphasized upon while evaluating/ implementing deals, with a stricter evaluation of certain constructs such as material adverse effect, force majeure or identified conditions subsequent, as well as specific consideration of the impact of COVID-19 on the performance of the company, specific warranties on pandemic events and the like.
While investment activity appeared to be in a slump in the early months of 2020, deal levels eventually picked up with investors tapping into opportunities emerging from the COVID-19 crisis itself. Although the pandemic caused a temporary setback in private equity/venture capital investment with a consequent fluctuation in the GDP of India; realignment of priorities, drawing renewed attention to sectors like food and grocery delivery, education, healthcare, and pharmaceuticals, including medical research and online sale and delivery of pharmaceuticals helped some investors sail through these troubled waters.
In the current uncertain and complex world that we inhabit, start-ups and investors alike, need to adopt an open mindset, adapt quickly to changing scenarios, focus on crisis management, and develop multiple contingency plans. Economic recovery from this crisis would also depend on the government’s response to the situation and the execution of the reforms it has announced to tackle the crisis. Overall, the private equity/venture capital industry is still a pillar of strength and expected to provide better momentum to the Indian economy in innovation, creation of new jobs, mentoring of entrepreneurs, and building of better infrastructure. Within the start-up ecosystem, stakeholders are taking multiple initiatives for start-ups with upcoming grants, incubation programs, etc, and over 50 per cent of start-ups expect revenues to reach pre-COVID levels within 6 months and we are willing to put all our chips on this number. Having said that, we’d like to end this piece with a line from the famous song Que Sera Sera (Whatever will be, will be) and only hope for the best for the start-up ecosystem and the PE/VC sector in the days to come.
Prashant Kataria is the Partner of Algo Legal. Views expressed are the author’s own.