As another financial crisis looms on the horizon, PE investors, VC and early-stage investment firms grapple with the perennial question: is the Covid-19 crisis the best time to invest in early stage tech businesses?

Angel investors and VCs that BusinessLine spoke to say investing in start-ups are always high risk, and that in a crisis the risk might increase, but the potential reward significantly increases, since valuations tend to be much more grounded during a crisis than at other times.

Investing in a start-up usually means investing in a commercially viable solution to a problem, experts note, with a crisis providing more problems than solutions. It is for this reason alone that investors can seek start-ups that pick out solutions to address the problems consumers are facing.

Serial investor Apoorv Ranjan Sharma, Co-Founder and President, Venture Catalysts, says life and businesses both have been thrown out of gear with Covid-19, as countries go for complete lockdown pushing millions into abject poverty.

“There is no playbook on how to manage a pandemic of this magnitude. But with the trends that we have witnessed over the last three months, healthcare, FinTech and HR-tech would gain prominence,” Sharma told BusinessLine.

Pandemics and funding

A seasoned veteran in the start-up sector, Sharma noted that capital markets have already touched the lower circuit wiping out trillions of dollars of wealth. He added, “No one can predict the damage caused by Covid-19 pandemic even though the world has survived past pandemics including spread of HIV, SARS and Anthrax.”

Other experts also refer to past virus outbreaks and their impact on funding. The SARS outbreak started in November 2002, and its impact on sponsored finance was swift, with total funding in 2003 and 2004 pegged at 27 per cent and 29 per cent below 2002 levels, respectively.

However, deal volume and funding both started to recover in the third quarter of 2004, according to a report by CB Insights, with funding hitting a new high in Asia and witnessing the now-fabled Yahoo’s $1-billion investment in Alibaba, shortly after the WHO cleared China of SARS.

Similarly, the Zika outbreak that began in early 2015, slowed funding dramatically, but following the end of the WHO’s global Zika warning, deal and funding activity gained significant momentum. The second quarter of 2017 brought a new high in South American funding, with a record $2.9 billion investment.

History repeats itself. If past performance is any indicator of the future, VC funding in Asia could experience a slowdown in 2020. However, notes the report, since the earlier downturns that accompanied a major viral outbreak were followed by an eventual bounce back, the end of the current coronavirus outbreak could well notch up landmark deals or generate new funding highs.

Dealing with the crisis

Geetika Dayal, Executive Director, TiE Delhi-NCR, says businesses across the globe, both start-ups and established companies are having a tough time. “For early-stage start-ups, the situation is even more difficult as they struggle to meet their day-to-day expenses. While this particular situation is unprecedented and has arrived suddenly and unexpectedly, we have to accept that this is not the first time the startup community has faced challenges,” says Dayal.

The executive adds small steps like “no layoffs or pay cuts, being kind to those in need, retaining customers by understanding their changing needs” would go a long way in normalising the situation.

Other early stage investors in India like PE and VC firms including Sequoia Capital, Accel, Kalaari Capital, SAIF Partners and Matrix Partners have cautioned that though the current changes to the macro environment could make it difficult for a start-up to close their next fund-raising deal, start-ups should not perceive a slow response time from investors as lack of interest.

The global VCs have urged start-ups to be responsive and persistent. Highlighting that valuation multiples are bound to be reset at this time, the VCs say in a joint note many investors are now valuing companies differently than a few weeks ago.

Noting that as a group they are ‘unequivocally bullish’ on the long term outlook for the start-up ecosystem, the note from investors urges start-ups to effectively manage high risk and uncertainty and plan for worst-case scenarios.

Nobody has all the answers, confirms Venture Catalysts’ Sharma, but as countries go for months of lockdown, this is going to be the new normal. “The contagion has already impacted some sectors pushing them into deep distress. For example, people would be scared to travel for a long time due to the virus scare. This would impact tourism, hospitality, aviation, and even railways,” he adds.

Though the businesses would not disappear, Sharma says these sectors would not remain attractive any more. Signs of distress are already visible for some of the biggest unicorns like Uber, Airbnb, and WeWorks, adds Sharma, but there is a silver lining. “As governments might go for smaller lockdowns, banks would go digital and fintechs would have an upper edge.” Ditto for healthcare and HR-tech start-ups.