What we are witnessing is destruction preceding creation
80% of the deals this past year were concentrated around consumer tech, SaaS, fintech and B2B commerce
Startups and investors must not lose sight of unit economics
The Covid-19 pandemic has laid bare and ravaged the global economy on an unprecedented scale. With many businesses facing an existential battle, the world is at risk of becoming a graveyard of jobs as human life comes to a complete standstill. Despite this, some eternal optimists would argue that this unfortunate quandary we find ourselves in will expedite the downfall of companies already under competitive pressure, paving the way for businesses at the forefront of innovation and technology.
This process of ‘creative destruction’, first coined by the renowned economist Peter Schumpeter, is believed to be a central concept of capitalism, and places entrepreneurs at the cornerstone of modern economies.
Now, in a free market economy, new industries, new products and new technologies constantly replace their older and less efficient counterparts. Therefore, creation precedes destruction. In contrast, however, many businesses which are being destroyed today are not victims of creative destruction. In other words, they are not losing out to superior market alternatives. What we are witnessing is destruction preceding creation.
Furthermore, the Indian public markets, a leading indicator of the economy, have been thrown into a dizzying tailspin. This recent market turmoil and the ensuing volatility perfectly encapsulate the broader market sentiment and understandably so.
That being said, all is not lost in this gloom and doom. As the 21stcentury rendition of the Battle of Mahabharata between the Indian economy and Covid-19 unfolds before us, the field is set for the startup ecosystem to exemplify the valor of Arjuna and claim new territories. The last decade, which proved to be a golden one for the venture capital industry, saw a rapidly evolving startup environment and a with it, a wave of venture capital investing.
This culminated in 2019, with a record $10 Bn investment deployed across various promising industries. India has been unique in its willingness to embrace risk-taking and entrepreneurship, and this willingness is what has made venture capital the chief driver of innovation. This is manifested in the fact that 80% of the deals this past year were concentrated around four business areas – consumer tech, software/SaaS, fintech, B2B commerce and technology.
Social distancing is the need of the hour, and coronavirus is shaping economic activity, consumer behavior and technology. These are major tailwinds for businesses with robust online strategies, which have found success in adapting to the changing business landscape.
Sectors such as online grocery marketplaces, edtech and content platforms, which have been VC darlings in recent years, are seeing a remarkable surge in demand for their products. This goes on to show the antifragility of the startup ecosystem, which is characterized by constant churn and disruption. While there are incessant failures, each iteration aligns it on the right path, leading to handsome payoffs from successful innovation.
One might respond to this seemingly unfounded optimism by asking “How would venture capital escape the downward spiral of the global economy?” As fear grips all equity investors alike, forcing them to tighten their purse strings, venture debt has leapt out of the shadows of equity in the wake of the crisis.
What was once considered a mere supplementary tool has assumed an equally important role in bankrolling promising industries and businesses. In a continually innovating venture capital universe, bespoke debt solutions are carving out a niche for itself, thus widening the ambit of venture capital.
I do not wish to suggest that everything in the garden is rosy, though. As we embark upon the new decade, we must learn from the mistakes of the previous one. One of the most important lessons that we must take with us forward is to jettison the ‘growth-at-all-costs’ mentality.
A wise man once said “Learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” The severe challenges facing numerous startups, which were once thought to be indomitable, serve as invaluable lessons on what really constitutes value. Startups and investors must not lose sight of unit economics.
The ecosystem has gallantly stepped up to the task thus far and will certainly come out, more resilient than ever. Like every other crisis faced by humankind, this too serves as an opportunity for Introspection. The onus is on us to make this a lesson that lasts a lifetime.
As the legend goes, when the Phoenix resurrects from the flames, she is even more beautiful than before.