Choosing to Back Early-Stage Startups in the Middle of a Pandemic
Every crisis presents itself with a plethora of opportunities waiting to be untapped, and the pandemic of 2020 is no different. Existing businesses are shaken to the core — customer spending in India reduced by nearly 40% between March-June as compared to last year and investors are putting investments on hold. Management is left with a business plan that holds no value in a fast-changing macro environment, with 12% of startups shutting operations by July. Even so, amidst crises often emerges an offshoot of new opportunities — unsolved problems that require deep innovation. The Stanford economist Paul Romer once famously said, “A crisis is a terrible thing to waste.”
History has often shown that some of the most innovative and resilient companies were built during a recession — Microsoft in 1975, Netflix in the late 90s, and Airbnb in 2008. Recession provides an occasion for entrepreneurs to think outside of the box, be efficient, and lay strong foundations. For example, Brian Chesky and Joe Gebbia (founders of Airbnb) were looking to rent out an air mattress in their living room in 2007, but the idea soon led them to an opportunity waiting to be seized. Later that year, with the advent of the Great Recession and the increase in rental prices, people started looking at not just air mattresses but rooms within their apartments. This led to the inception of Airbnb as we know it today.
Rise of New Opportunities in the Middle of the Pandemic
At the beginning of the year, we were foreshadowed by the century’s largest health crisis, and could recognize early signs of what would eventually become a global recession. Initially, several businesses bore the brunt of the global lockdown that halted business activities. This was especially true for companies that relied heavily on human interaction or movement, bringing them on the brink of shutting down, such as travel, hospitality, etc. However, as time went on, it became apparent that the world was also introducing unsolved problems waiting to be solved.
COVID-19 presented mankind with one of the most challenging health issues, but it also accelerated digital adoption by a decade. Remote working, increased focus on health and well-being, online education, and SME digitization were starting to see tailwinds emerging from an extended lockdown. The pandemic was not only affecting the way businesses functioned but also changing the way humans thought and behaved. Often such behavioral changes have long-lasting impacts — the deeper the crisis, the more profound the behavioral changes that it results in. Therefore, a company built to cater to that behavior is likely to remain relevant for years or decades to come.
Perfect Time to Build a Resilient Business
A recession brings to light the systemic issues prevalent in society that need to be solved by innovative and dynamic entrepreneurs. At the same time, it provides a range of benefits that can help the founder lay a strong and unshakeable foundation:
- Good talent which is often out of reach of shallow pocketed startups become available during a downturn;
- At a time when competitors are forced to hibernate, a young and agile startup has the opportunity to move quickly and create a level playing field for itself;
- There is less competition in the market for capital and resources;
- Last but not the least, it allows a founder to focus on the essentials, keeping the cost structure lean and providing a quicker path to profitability.
Great Time to Invest in Resilient Businesses
Not only are downturns a great time to start a business, but also an opportune time for smart investors to bet on them. A global crisis allows you to test both the idea as well as the founder’s potential. Usually, only founders with a strong conviction start during an economic crisis. They are not only forced to think out of the box, but also build a business keeping potential downsides in mind. The ones who are only in the game to ride the wave of success fall away and only the ones who are in it for the long run remain.
Moreover, in the startup ecosystem, you expect to see a peak at a time when everyone is excited and bullish. When the times are uncertain, capital starts to dry up in the ecosystem, which is an ideal time for contrarian investors to bet on valuable companies that they believe would see light at the end of the tunnel. As an investor, it is important to have a long-term vision and invest in startups that will be relevant today as well as tomorrow, even if they start in the middle of a pandemic.
As a micro VC fund that started in March 2020, we at Eximius Ventures have grown to learn and build ourselves with the changes and challenges this economic crisis has brought. We have revamped our investment thesis, became comfortable with online due diligence, and managed to build an entirely remote team. Since our origination, we have underwritten nine companies* in the past nine months, and plan to continue on our trajectory.
In the times to come, we expect online education, especially in vernacular languages, to take center stage along with offline schools (benefiting startups such as Lattu Kids* and Classplus). SMEs are likely to get more comfortable with enterprise softwares that would enable them to manage supply chain, logistics, sales, and human resources digitally. We also expect ingenious productivity and collaboration tools to emerge that would allow people from multiple geographies to coordinate easily, as well as content creation platforms in vernacular languages built for the next billion (kudos to team Trell* for identifying and tapping into this).
If you and your team are solving new problems and building something exciting, let’s have a chat at firstname.lastname@example.org
*Investments by Pearl Agarwal, Founder & Director, Eximius Ventures
Eximius Ventures is a pre-seed stage investment firm investing in young and dynamic Indian Entrepreneurs with a precedence for female founders. You can reach out to us at email@example.com.