Lightbox
India

Sentiment - the X factor

Sandeep Murthy
1st January 2020

We are seeing a changing of the guard from old world businesses to new technology companies. This shift has been taking place steadily around the world at all stages across industries for the past 20 years and has accelerated in the recent decade.

Start ups can keep investors up at night, but you can usually scenario plan for most of the challenges that may arise. However, shift in sentiment is one risk that is hard to predict. Optimism and a sense of stability made the first half of 2019 a solid year for start ups to raise capital, but the second half of the year saw some challenging geopolitical issues arise both in India and around the world. These factors will continue in 2020 and may cause some of the later stage rounds to come under pressure both in terms of amount of capital as well as valuation. If uncertainty remains for an extended period of time, then earlier stage companies may also start to feel the impact. However, the efficiencies offered by technology led businesses will ensure that companies with solid product led differentiation and well defined business models continue to enjoy the attention of customers and investors.

We are seeing a changing of the guard from old world businesses to new technology companies. This shift has been taking place steadily around the world at all stages across industries for the past 20 years and has accelerated in the recent decade.

 

 

The same shift is happening in India. Start ups can leverage technology to create better products at compelling price points that can be distributed to consumers in an efficient manner. Due to extreme fragmentation of distribution channels there are few incumbent “offline only” brands so start ups don’t have to fight the battle of winning large bases of consumers from incumbent brands. This is why investors have flocked to the consumer space. While this opportunity is subject to cyclical patterns of the economy, we find that a downturn in the economy pushes consumers to look for more efficient and cost effective products and services. This is where technology enabled companies have an advantage. For example, this past year while FMCG growth slowed, smart phone sales have increased and actually outpaced feature phone sales in the second quarter. This shows a clear desire for consumers to ramp spend on items that will give them access to more products and services in a more cost effective way.

Businesses will have to navigate through a tough period of finding the right product proposition and business model to take advantage of this opportunity. If sentiment shifts while companies are still in the “finding phase” only those that have a strong balance sheet and burn in check will give survive. Those that have been especially astute at managing their cash positions may actually see an opportunity to consolidate weaker rivals.

With US elections, continued Brexit challenges, Indian social unrest and a multitude of other political and social uncertainties, the direction of sentiment remains unknown. Given this, the only thing we can count on is what we control – product and cash flows. So as we get ready for the rollercoaster of 2020, we have ensured that our portfolio companies have managed their burn and cash positions. In cases where portfolio companies have significant cash reserves, we will work with them to explore acquisitions that will strengthen their product differentiation. We will look for new opportunities that have solid unit economics and clear product differentiation. And we will watch with bated breath the drama that unfolds around the world and hope that sentiment cooperates with our plans.

 

Tags
Share