Portfolio diversification and virtual bootcamps: How VCs are evolving in wake of COVID-19 pandemic

The outbreak of novel coronavirus has wreaked havoc on the global economy, setting off a domino effect of stock market instability, mass unemployment, and closing down of small businesses and startups. The impact of the COVID-19-triggered economic crisis, however, is not just restricted to business owners. It has also created new sets of challenges for the venture capital firms, which mostly rely on public markets to source their capital. Other factors such as rapidly evolving consumption patterns, dwindling customer spending and the uncertainties around the future have forced the VC community to relook into their investment strategy. 

A radical shift in focus for VCs

While they continue to strike new deals, a few investors are looking at postpone their long-term investment plans and large-size deals to support their existing portfolio of companies. In fact, many VCs and private equity investors have scaled up their support to their portfolio businesses by providing emergency capital, financial advisory and additional mentoring. They have also become more cautious in their investment approach, weighing in multiple factors before proceeding with new investments. The focus has moved from short-term aggressive growth to long-term sustainable growth. In terms of sectors, VCs are opting for startups operating in FMCG, e-retail, online grocery delivery, EdTech, cloud computing and FinTech, among others. 

Diversification of investment portfolio

In recent years, it has become a common practice for VCs to invest in tech-centric startups. This is because India’s startup ecosystem is largely dominated by tech startups, accounting for the lion’s share of total funding received from investors. Data from research firm Tracxn shows that local tech startups in India raised $14.5 billion in 2019. While these tech-centric startups are still in the limelight, VCs are now considering taking a more balanced approach towards their investments to create a diversified portfolio and mitigate market risk. There is renewed interest in sectors such as FMCG, food processing, healthcare, wellness, and supply chain, to name a few. As previously observed during the 2008 financial crisis, portfolio diversification is a good way to mitigate financial risks and ride out the market volatility. 

Virtual mentoring and guidance

Most startup founders have little to no experience in handling a crisis of this magnitude. Therefore, they need a lot of handholding while navigating their way through the chaos. Keeping this in mind, VCs have ramped up communication with entrepreneurs and startup founders. Besides offering business insights, they are advising startups to re-evaluate their businesses models and re-define their financial projections to gain better control over cash burn. With lockdown restrictions in place, in-person meetings have been replaced with video conferences and Zoom sessions. Some VC firms have also launched virtual bootcamps, webinars and pitch sessions to help startups seamlessly connect with potential investors, corporate leaders and other businesses. 

The road ahead: A glimpse into the future of VC investment 

While it is too early to predict the long-term impact of COVID-19 on VC investments, few trends that are likely to shape the future of the VC community have come into the light. Firstly, it is a fact that investors are no longer interested in me-too models – they would rather invest in businesses that do not have unrealistic goals and can promise steady growth in the long run. Secondly, quality will take precedence over quantity in investment. VCs will make less number of investments, but the investment amount will increase once the crisis subsides. Tranche investments can also make a comeback as it safeguards investors from incurring major losses. It is the process of investing in tranches over a period of time instead of giving all the money at once. As such, each tranche is released only when the investee entity reaches predetermined milestones in terms of business growth. 

The startup ecosystem will take a long time to revive from the aftermath of the coronavirus pandemic. Until then, it is the onus of VCs to lend a helping hand to thousands of cash-strapped startups that are struggling to stay afloat. However, the support has to go beyond funding. VCs and private equity investors must take a proactive approach to offer more holistic support, empowering startups with access to mentorship and networking opportunities.