Start-ups: How to attract VC funding in 2021

'We want to look at very strong entrepreneurial teams.'
'I want to focus on a full team and not just the entrepreneur, which is building innovative and amazing differentiated businesses in large markets.'
'We also look at business models that are proven and have reasonably good gross margins, which show that this is where a lot of value is getting built.'

Pankaj Makkar, Managing Director, Bertelsmann India Investments, a venture capital investment firm, discusses the start-up trends that worked during the 2020 pandemic and start-ups that will attract VC funding in 2021.

"Wherever we find great entrepreneurs building a solid company, we will be happy to invest in them," Makkar tells Prasanna D Zore/Rediff.com.

What were the major trends seen in December 2020 in the context of the COVID-19 pandemic changing venture capital investing?

If you were to divide venture capital investing into three different parts, that is early-stage, mid-stage, and late-stage investing then we saw three different types of approach in all of them.

Early-stage investments which is anything from seed investment to Series A and A-plus type of investments did face an initial slowdown but all the VC investments and the market in-itself came back pretty quickly to continue usually.

Given the fact that companies in this bracket are not usually building products or services for market dominance or market penetration but rather focus on holistic product development, a lot of companies in this segment whose major goal was product development, attracted significant VC investments and in a year from now, one can see them penetrating the market and fighting for a larger share.

In that sense, for early-stage investing, it was business as usual.

In the mid-stages of Series B and Series C, where BII operates, the focus was on building your own portfolio companies for success and making sure that they have enough cash, which was one strong theme being followed. Wherever funding was required, the companies did receive adequate funding from the VCs.

Some of the sectors that saw growth in COVID period include EdTech, HealthTech, FinTech as well as SaaS (software as a service) -- which saw massive investments in the middle spaces. It was a very distributed trend in these sectors.

When we talk about the third type of investors which are late-stage investors, there was a flight of capital towards quality.

Whichever companies could strongly sustain the pandemic and also grow out of it, whether with tailwinds or were neutral to the COVID situation, there were significant rounds of financing done into those companies.

Hence, we saw significant unicorns coming out backed by late-stage investors around a handful of companies.

How did the VCs adapt themselves to this changing environment and the challenges that emerged during the pandemic?

I could tell you that as far as early-stage investors are concerned, when I talk to them, outside of not investing in a couple of sectors that have created significant uncertainty around some of the business models, there was business as usual for them.

People like us in the middle-stage also took calls on which sectors will get accelerated or which sectors will not get accelerated due to COVID, and will probably continue to invest around some of those themes.

Later-stage investors have become a lot more conservative and want to see a lot more growth.

Also, what happened is that the prices in the middle to late-stage investing also kind of got corrected, unless you were in a sector which has been positively pushed by COVID.

What are the major trends likely to emerge this year and what will be BII's focus for the coming year?

For us, I have already spoken about the trends; there are certain sectors which will continue to be hot and a lot more deals will happen in those sectors because they have seen a significant consumer shift that has happened towards either online businesses, lot more SMEs are coming online, EdTech, HealthTech and so on, where six or seven big deals that are happening.

From a BII perspective, we are looking at some companies that are already in these sectors and we will continue to support these companies.

If we find other interesting opportunities in these segments, then we will definitely make some new investments.

Will the trend of EdTechs, FinTechs, and HealthTechs attracting more VC funding continue in 2021?

Most of the tech companies will attract a lot more funding. E-commerce will continue to do well; although most of the horizontal e-commerce has now largely big players like Amazon, Jio, and Walmart/Flipkart. These will continue to grow bigger and bigger.

Vertical e-commerce players will also grow fairly large. There is anyway a trend towards contactless buying which is very helpful for the growth of horizontal as well as vertical e-commerce.

We would definitely see payments, as well as logistics-enablement sectors, becoming extremely large. We are quite excited about how these sectors are shaping up.

Finally, when you talk about HealthTech as well as EdTech, a significant amount of funding has already happened and more will also continue to happen over the next couple of years.

What will be BII's focus in this year?

We are sector-agnostic, and in that sense any sector which has not been badly affected by COVID, we are open to looking at those sectors and wherever we find great entrepreneurs building a solid company, we will be happy to invest in them.

Which sectors were the most affected and those that benefited the most in terms of VC investing due to the pandemic?

As COVID is a contact-based medical issue hence, businesses that had the most amount of physical contact such as the hospitality sector, physical retail, and travel sector were the worst affected followed by mobility-related sectors.

On the contrary, contactless service sectors such as OTT (over the top) businesses like Netflix, Amazon Prime, online education businesses have been doing amazingly well as they are done remotely, and one does not have to be physically present to get online education.

HealthTech too benefitted because people were buying a lot more medicines and were affected positively because of the pandemic.

The other big thing is, given how well e-commerce has done and how horizontal and vertical e-commerce are beneficiaries, we also see significant direct-to-consumer online brands getting built, and built-up in these sectors has been fast-forwarded by a few years.

What will be your advice for Indian start-ups, especially, if they want to catch BII's attention?

At the mid-stage Series B-C level, we want to look at very strong entrepreneurial teams, and I want to focus on a full team and not just the entrepreneur, which is building innovative and amazing differentiated businesses in large markets.

We also look at business models that are proven and have reasonably good gross margins, which show that this is where a lot of value is getting built.

Gone are the days, where ten years back people used to work on very thin gross margin businesses.

The trend of high-gross margin businesses is the norm and if somebody wants to catch our eye then they need to have very strong gross margin businesses.

Which start-ups or sectors look promising in 2021?

E-commerce, E-commerce logistics, direct-to-consumer, Edtech as well as HealthTech and even to some extent, some portions of FinTech will also do well in this year.