In February, a Bengaluru-based fintech founder was in the middle of an oversubscribed Series A round with two term sheets from top-tier Indian funds to raise $5 million.
“We were in the due diligence stage and most things were done. Suddenly, I received a joint call from both funds to understand my take on the Covid-19 virus outbreak and its impact on our startup,” the founder said.
“Like most people, at that time it was hard to say much about what this really meant… A few days later, both backed out citing unsure market conditions. These firms typically honour deals, and commitments.”
The startup founder’s case is not unique.
Investors in early stage startups are likely to trim the number of financing rounds significantly over the coming quarters as they conserve cash for existing portfolio companies amid an overall uncertain global economy in light of the Covid-19 pandemic.
Multiple ongoing deals talks have been shelved or put on hold citing “force majeure” (unforeseen circumstances), leading to fear among entrepreneurs whose companies do not have a long runway, people in the know told ET.
The number of seed and early-stage deals fell 37% to 228 in the first quarter of the year ended March 31, compared to the corresponding period last year, according to data shared by Tracxn, which collates data on private companies.
The data also suggests that the number of publicly disclosed deals fell 18% between February and March alone. However, these deals would have likely closed months prior to the Covid-19 virus outbreak.
A lawyer involved in fundraising deals told ET that five out of eleven deals that had seen interest from investors in the United States and Europe have been put on hold.
“Asia has also largely been closed for the last month, and at this point, no global investor is interested in new deals till the dust settles… But they continue to watch the market,” he added.
Anup Jain, Managing Partner at Orios Venture Partners termed the next 90 days as critical for deals, saying “funds will now disproportionately preserve dry powder to finance their own portfolio companies.”
“At the same time, fewer people are starting up and deal flow is down by at least 30-40%, thereby shrinking the pool of new businesses as well,” he said.
According to data from Orios Venture Partners, there was a 30% drop in deal numbers in March, compared to the last three-month average.
Several top VCs echoed a similar view. “Since business models have been impacted significantly, everybody will need some time to digest this and figure out answers,” said Vinod Murali, Managing Partner of Alteria Capital Advisors, a Mumbai-based venture debt fund that has backed companies including bike-sharing app Vogo, logistics platform Loadshare and real estate platform Stanza Living.
Deal sentiment has taken a knock over the last few weeks after India imposed a nationwide 21-day lockdown to control the spread of the virus.
To be sure, just a quarter ago, most top funds were aggressively scouting for deals and launching programmes to tap founders early in a hyper-competitive deal-making market.
“There will be fewer negotiations on valuations now. Globally, deals have started to fall. We expect the deals to decline by at least 20% to 30% in the coming months in both volume and value,” said Anuj Golecha, cofounder of Venture Catalysts, a startup incubator.
Investors also fear the wavering commitment of their own Limited Partner (LPs), which are backers of funds.
They say high net-worth individuals (HNIs) and large family offices have been restructuring their portfolios after the recent economic environment and budget announcements impacted their asset allocation plan.
At the same time, LPs in the US and Europe who are heavily leveraged may backtrack or delay drawdowns, they say.
“Stock indices globally have lost value, and pools of capital that are otherwise tied to these indices are therefore unavailable; even when a majority of holdings stand liquidated, LPs are preferring to keep their funds liquid,” said Vatsal Gaur, Associate Partner of HSA Advocates.