‘It’s a bear market.’

‘We are headed for a recession.’

‘There is a funding drought.’ 

I’d be willing to bet my bottom dollar that you have heard a version of these statements in the last couple of months. But the fact of the matter is that there is no escaping the cyclicality of economics. The markets will go through a downward cycle every few years. For an intelligent investor though, this is a golden opportunity. 

Turning a Slump into an Opportunity 

A sluggish market is the best time to start your investment journey in the start-up space or to double down on your investments. Because right now, a great idea or a start-up run by an enterprising founder can be available to you at a reasonable valuation. 

If you approach the situation armed with the right thought, solid research and clear objectives, you can possess (or increase) ownership of a well-founded company with great management that can potentially generate great returns when the cycle will inevitably turn bullish again.

If you are an early-stage investor, then these down cycles can also bring opportunities to invest in select start-ups that otherwise wouldn’t have been available to angels. 

 Needless to say, there isn’t a single asset class that precludes the risk of loss. However, start-ups (when reviewed on a portfolio basis) have consistently delivered > 20 per cent Internal Rate of Return (IRR) as opposed to 3 – 12 per cent IRR that you get by investing in other asset classes. Portfolio Strategy enabled with strong upfront due diligence and stronger post-investment support should translate into best-in-class returns across different asset classes. 

The COVID Catapult 

A horrific phase, COVID-19 put the brakes on countless industries and work models. With everyone stuck at home, it was e-commerce, digital payments, online education, telemedicine and ancillary industries that moved the world around. 

The fear of catching the virus meant that no one wanted to touch anything, even money. It almost forced people to move to online payments leading to a rise in the number of online transactions. 

The pandemic effectively propelled e-commerce and digital adoption in India 10 years into the future. Even after it loosened its hold on the world, people continue to use online payments and e-commerce, because of habit. What started as a compulsion is now a convenience. 

It is no surprise then that 2021 was a major year for the Indian start-up ecosystem where more unicorns were added than previous years put together. This upward movement continued in Q1 ‘22 when 528 start-ups raised $12 billion. 

Clearly, interest in the Indian start-up ecosystem is at an all-time high. And while we have seen some softening in the markets in the last few months, it is part of the cyclicality. As is generally observed with financial markets, every trough brings a rise higher than the previous cycle’s high. 

The Domestic Market Advantage 

India’s GDP is expected to cross $5 trillion in the next three years and $10 trillion in the next 10 years. Consumption has been on the rise and we are spending almost twice of what we were spending 10 years ago. 

What’s more, with 50 per cent of our population below 30 years, consumption and expenditure will continue to rise unabated. This means that the domestic economy will continue to show strong growth in the long run. 

 Apart from being a young nation, India is a mobile-first country. With close to 800 million broadband subscribers, it is second only to China in terms of internet users. 

Since many of these users are mostly urban, there is huge untapped potential in India’s rural markets. As rural internet users grow, so too will data consumption and the number of transactions. The space is nowhere near saturation and the demand for funding is set only for growth. 

Even the Government Chips In  

Today the central and state governments are recognising the important role that start-ups playing in our economy. They are generating employment across industries and using technology to create solutions for problems that have been plaguing India for generations, thereby lifting people out of poverty. 

They are also generating strong FDI inflow. So, the government has made it their business to not just support start-ups but also support the funds that support start-ups. 

However, that does not mean that the start-up space is without its challenges. A lot of it is the ripple effect from overseas markets. 

Financial superpowers in Europe and America are all fighting inflation and consequent actions are forcing economies into recession. In the last few months, there has been a continuous decline in funding. Big players in the start-up ecosystem like Ola, Blinkit, Unacademy, Whitehat Jr, Vedantu, and Cars 24 have laid off staff to cut costs. 

It is these high-pressure times that separate a good start-up from a great one. It was during the economic downturn of the 1970s when visionary founders like Bill Gates and Steve Jobs found ways to build companies that are household names with trillion-dollar-plus evaluations. 

So, while these ongoing layoffs will pinch in the short term, in no way do they signal the demise of edtech or fintech, or even the broader start-up ecosystem. A long-term investor needs 0nly the patience to ride out this storm. 

Sometimes, the down cycles are good. Yet many funds have raised record capital in the last 12 months with a focus on India. And now Big Tech is making a comeback on global bourses and even Indian equity markets are bouncing back. 

Keep At It

Investor in the start-up space need not be alarmed by temporary fluctuations of the market. Instead, they should have an investment horizon of at least five to 10 years. 

As an investor, you may choose to work with the start-up, opening your network to help generate business, monitoring, and advising as required. But to be a successful investor in the start-up space, the process to generate returns begins with undertaking stringent due diligence. 

Sustainable growth and leveraging the country's local production strengths will dominate India's investment estimate in 2022. It is still a positive outlook for the success and growth of the ecosystem, despite the challenges. To achieve success in angel investing as an asset class, this approach is crucial.

- Ankur Mittal is the partner at Physis Capital, a fund from Inflection Point Ventures  

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