Startup Success Mantra in the Time of Crisis - Rethink, Reimagine & Recreate

Where will the world head to in the coming days is quite a big question! With the government extending work from home till end of this year, the future of the corporate world is still bleak. India is entering into the phase of community transmission and the number of cases has just put the gears on. Despite the economy suffering, most of us are optimistic about the future. However, today from corporates to startups & investor community, every sector is travelling through difficult terrain. Despite known as a rising startup ecosystem, India’s startup ecosystem is experiencing lack of fund in-flow, as 33 percent startups surveyed by FICCI-IAN said that the investors have put the investment decision on hold while 10 percent mentioned that the deal have been called out.

But where is the startup and investment community heading from here? What is the way forward and how is the investment community working towards strengthening the foundation further? To know the answers, I interacted with Vikram Gupta, Founder & Managing Partner, IvyCap Ventures. Vikram holds over 16 years of experience in private equity, business consulting, M&A, strategy and operations in healthcare & life sciences, education and consumer goods.

What is the biggest issue the startups & investors currently face?

We are all struggling with the COVID-19 situation, which has come up as a challenge both for startups and investors alike. Coronavirus has emerged from nowhere and no one ever predicted that everything will shut down from March onwards and things will continue to be like this for a while.

So what is the biggest challenge? It is the substantial and in certain cases, permanent changes in the mindset of the people and the consumers that startups are catering to and therefore, that has made the founders of the startups to rethink, reimagine and recreate their own plans. In certain cases, things are looking more positive in the next couple of years compared to pre-COVID era, but in certain cases it’s already looking bleak and grim.

Hence from an investor’s perspective, we have to be very detail-oriented and understand the things changing, what is getting impacted & what not, how are founders dealing with it, how are people becoming nimble and using cash, how people below the line are reacting to it, how the founders are dealing with their own people & engaging with their customers, and making the investors feel comfortable. No doubt, there are multiple issues at multiple levels that both startups and investors are dealing with right now.

Where do you see the investments moving currently and what kind of startups will get funded? Also tell us about the kind of startups we can see IvyCaps funding & mentoring.

Most of the investors including us are going back to our own portfolio and looking at where they need support while identifying their struggling points. We are also determining the ways to help them modify their business need model while ensuring they have enough cash to sustain and come out of this crisis positively.

So what are we doing as investors apart from ensuring our own portfolio is secure, healthy and un-impacted? Any investor who has received a term sheet just before COVID or evaluating any business for investment during that time would take a step back and analyze changing assumptions, and investment opportunities. Post which it’s time to go back to the whiteboard, relook at the forward looking plans and find the situations we have control on, and predict the future of the business. This helps ensure that the investments don’t get completely impacted but may get delayed to some extent.

On the other hand, we investors are analyzing and dealing with the new shift in the ecosystem created by COVID, which has pushed everything online. Also banning the 59 Chinese apps have created a vacuum in the industry which many startups are filling in. I am very positive about these opportunities and see such tech-based startups getting major funding and mentoring from the investors. However, as the market gets cluttered with similar apps, it is crucial for investors to find those that will fulfill the need of the market.

These are interesting times while being challenging too. Entrepreneurs who really understand the bigger picture and know how to tackle them will benefit the most as they will be successful in gaining the trust of the industry. And investors who understand this will put their money in the right basket and therefore gain substantially for the next few years. In my view, some of the investments happening now may become unicorns very soon, which you may have never expected few months back.

Do you see the startups emerging or getting funded be majorly in the app space that will fill in the gap created by the banned Chinese apps?

While there exists a gap, I honestly am not able to conclude what is actually going to happen and if this gap has short or long term impact. Most of these banned apps already have their competitors in the market, but then who will succeed is unpredictable.

I would suggest the investors to be cautious before investing in these companies as we do not know how the Chinese companies are going to react to this ban. For instance, the CEO of Tik Tok recently moved to India. So now the question is are they going to rebrand themselves into a different company using the same code or approach the market differently without posing themselves to be a Chinese organization but still have the same muscle power. Hence it is too early to judge if the new apps will emerge winners in the market.

Even I am in a wait and watch mode as far as these apps are concerned. It is still a very fundamental value creation and so should focus on long term value creation rather than short term to leverage the opportunity.

What is your piece of advice for the startups?

I would advise not to get excited by the short-term advantages. Study the market and the competition but don’t follow the copy paste format as it has multiple issues, just like Reliance had with Zoom. Hence you have to be very careful with what you and your products are doing, and ensure you are not infringing any other brand. Also make sure to study the potential market from different angels in terms of what is the cost of customer acquisition. Remember that the existing brands have already spent millions of dollars to acquire customers, and hence just copy pasting will never ensure customers will shift to your platform.

It is not an easy game, but a high risk one which will ensure high return only if you put the strategy properly, differentiate yourself, enter the market at the right time, right place and get funding from a potential investor. But it is important to note that out of these hundreds of the players, only a couple of them will become unicorns and therefore the investors have to be very cautious.

So what kind of startups do you see becoming unicorns?

Let’s understand the broader picture of the market and what’s happening now in the market. On one hand, there is a constant rise in internet penetration, on the other hand there are an increasing number of buyers coming online and majority of them adding from tier II and III cities.

This move is creating a huge impact and with people opening up to buy products akin to jewelery, shoes or even clothes without seeing, and experiencing, the market will further swell. In the coming days we will see an increasing penetration of non-standardized products in the market. I think that is going to happen more. On the other hand, startups like healthtech, edtech, and fintech will also see the golden days.  

What strategy would you advise them to achieve this success? What is IvyCap’s role in enabling & empowering such startups?

Keep the focus right. Anything which is non-core should be de-prioritized and move the focus to your target customers & products. And if you are not profitable, then reduce the cash burn as much as possible so that your survival is much longer than your initial plans. I see this as a constant message which passes through the startups at the macro level. I have never witnessed such level of appreciation and understanding of the fact that capital efficiency is the most important thing.

IvyCap has been investing since 2011 and our fundamental since day one has been to invest in entrepreneurs who are capital efficient. This is the reason why our portfolio has actually performed far better even during this time. Capital efficiency is very crucial but it is equally important that you retain your best people and provide all the support that you can while taking their support simultaneously. There may be salary cuts or salary delay and improved efficiency, which is quite encouraging to see.

Even in the cases where the customers are not necessarily buying, it is extremely important to stay engaged with them. For example the travel companies, who are sending videos to their clients asking them to stay home and stay safe, conveying all these in very creative ways. Such acts leave a long lasting impact on the minds of the customers and when the market opens up again, these will be the companies who will recover much faster. Not just the previous engagement, but ongoing engagement with the customers are very important.

It is a very good time to rethink, reimagine and rebuild. An opportunity to actually reposition yourself and create IP and prepare yourself in such a way that whenever the market opens up, you can take advantage of these, rather than losing this time and opportunity which is right in front of you.

So stay positive, stay focused and keep moving!

What are the investors and startups’ expectation from the government?

To be fair, on one side, the government has actually started acting and have taken several decisions but on the other hand, the execution needs push and the impact is yet to be seen. One such initiative is the various loans for startups, but then many of these startups are still waiting for the benefits to come to them. However, I would say that the amount of funding they have offered is quite a job done in the right direction but I think it’s not done in the way or the extend it should have been done as the number of startups in the country is way larger than the support provided.

In my view there is an opportunity for the government to work very closely with the VC funds, investor community and the startups at large to provide various other schemes. When I look at the US scenario, the government there has taken an applauding step to curtail job loss. The government brought the policy where people could take soft loans to pay their salaries for three months. If you justify certain basic criteria, the loan is granted with no questions asked. In fact some of our own portfolio companies operating in the US got benefitted because of that and absolutely no hurdles; you apply and you get the loan transferred into your account.

But the challenge in India is that you apply and then keep following up while the authority keep asking you more and more questions. I think the concern is that majority of people asking for loan are not the right people, whereas in the US, this leakage would be minimal. Due to some such dirty elements, the genuine startups suffer and die unnatural death.

Hence there needs to be a system to provide more automated support rather than getting people involved. Even we have created systems and processes where if when you meet certain criteria, the system itself approves you and you do not need to go through all those critical processes.

What role is IvyCap playing currently and how is it going to boost the startup ecosystem?

Our Ivy Camp platform is a disruption. The camp organized COVID-19 challenges and came across few companies that were very exciting. We are supporting & investing some of those startups. We also provide several educational series, seminars and webinars, which are aimed at and attended by startup community to make them feel that they are not lost and have ways out.

We are also collaborating with other investors and have set up a 100 crore fund for startups who are fighting COVID-19. We are supporting them in various ways to ensure that they get funded. At this point in time, funding is just one aspect, but startups need mentoring & guidance to be on the right direction. Here our dedicated mentoring platform, which is a part of Ivy Camp and our Series A & B investments, has an important role to play. This platform is our alumni community comprising of IIT & IIM alumni as anchor investors to help startups get handholding and access to funding.

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