A clutch of blue-chip venture capital firms anticipate a funding downturn for home-grown startups, a scenario which will prod them to reassess aggressive growth plans and, instead, conserve cash.

“Assume it will be very difficult to raise financing in the next three months, and possibly beyond,” says the note jointly put out by Accel, SAIF Partners, Sequoia Capital India, Matrix Partners India, Nexus Venture Partners, Omidyar Network India, Chiratae Ventures, Kalaari Capital, Bessemer Venture Partners, and Lightspeed. Cumulatively, these funds (barring Omidyar and Bessemer, which invest from a global pool together and have invested close to a billion dollars in India) have approximately $10 billion-$11 billion in assets under management.

According to the note, the Covid-19 outbreak could potentially rewrite the rules of fundraising in India. Home-grown startups had raised as much as $10 billion in 2019, the highest ever and 55% higher than the previous year, while deal volumes increased 30% year-on-year, according to a report by Bain & Co. The valuations of several startups also jumped manifold.

The past few weeks, however, have seen turnovers of businesses nosedive. While consumer-facing businesses have been impacted by a cutback in discretionary spends, apart from operational challenges in the wake of a nationwide lockdown, startups catering to businesses could struggle to seal new contracts or even secure timely payments from clients.

Consequently, the buoyancy in the fundraising environment, which was the case even a couple of months ago, could be a thing of the past, despite the venture capital firms sitting on large pools of capital. The Bain report pegs the total dry powder with investors at the end of 2019 at $7 billion.

“Assumptions from bull market financings or even from a few weeks ago do not apply. Many investors will move away from thinking about growth at all costs to reasonable growth with a path to profitability,” the note says. “Valuation multiples will be reset. This is because many investors perceive there is much more macro risk today and public markets are now valuing companies differently than a few weeks ago.”

A flat round that extends the runway by about a year is a “good outcome” in such times, the venture capital firms say.

Startups seeking growth capital will wait for the U.S. and China markets to recover. “India’s startup ecosystem doesn’t operate in isolation and is dependent on external capital primarily from the U.S. and China. It is likely that the Indian mid to late stage startup financing markets will see a rebound only after their home markets rebound,” the note says.

A rush to conserve capital will have its ramifications. For instance, a cutback on marketing spends — the note urges startups to slash marketing spends by 50%-100%— will impact the advertising industry. In an attempt to gain eyeballs and new customers, some of the country’s most well-funded startups have been aggressively spending on marketing. According to a news report, top e-commerce companies were expected to fork out about 6,700 crore in advertisements last year.

Similarly, the investors have urged companies to renegotiate their payables, including office rentals. Even expenses such as cloud spends and external professional fees — consulting, legal, and recruiting — could be significantly slashed, which implies that businesses of consultants, law firms, and recruiting agencies could take a hit.

“The lockdown is making all the startups relook at the cost. Do we really need to incur this cost, is a question everybody is asking,” says Sreedhar Prasad, independent consultant, who had earlier worked with Kalaari Capital as a venture partner and KPMG India, as a partner.

“Consulting, legal firms, or digital marketing firms, among others, are likely to have a bad year because not just startups, but every other business is cutting down (spends). Startups will add to it. Startups work in a different manner, they are about quick decisions and so it is easier to win projects with them. But the aspirational services which the startups resorted to will definitely become zero in the next three months and the subsequent two quarters will be slow,” adds Prasad.

The venture firms have a clear message in the note, “No costs are really fixed.”

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