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            [slug] => an-opportunity-in-crisis
            [title] => An opportunity in crisis
            [content_type] => article
            [team_id] => 4
            [publish_date] => 2020-09-29
            [short_description] => Are private equity firms 2 faced? How does the financial service sector deal with challenges? Read on to find out:
            [description] => 

1. It is sometimes cynically said that Private Equity firms are two-faced: angels on the one side (while giving money), and devils on the other (while demanding their pound of flesh)! At the outset, please share with our readers what makes a Private Equity firm an important part of an economy.

Honestly, I don’t know any industry that doesn’t have its share of demons and angels. Private capital is no different. The important thing is to make sure one doesn’t generalize any one industry as either only demons or only angels. 

On the question of the importance of private capital (which I will refer to collectively as venture capital for the sake of brevity) in the larger economy, here is my two cents. In our immediate future and beyond, invention and innovation will drive our economy, more than any other single element. And entrepreneurs are going to be the force behind it. At their side, will always be private money, in the form of venture capital, to help them in ways no one else can, and of course, for a piece of the action.

I would argue that venture capitalists come at a point of an entrepreneurs journey when no other pool of capital dares to even try. In essence, venture capitalists come in at the ideation stage, they nurture it for a short period of time, and then exit before the true value of successful companies is realised. How much innovation would the last 50 years have seen if it weren’t for venture capital? How much innovation would the last 15 years in India have seen if it were not for venture capital? Dare I say, not much unfortunately. Where would the founders of Flipkart, Infoedge, Ola, and MakeMyTrip be today? Probably still standing in line at HDFC Bank’s loan department hoping to meet an officer for the 100th time. And we would still be struggling to find a taxi and booking a flight. How lucky we are, as consumers (and how lucky are they, as founders), that venture capital happened to be around.  

 

2. As Covid-19 continues to impact us all, businesses are faced with more uncertainty than any period since the global financial crisis. What are some of the challenges that have come about due to the pandemic on the financial services sector, and specifically on private equity firms?

Venture capital is not the same as traditional financial services companies. The kind of issues faced by venture capital businesses aren’t the same as the larger finance sector. And although the pandemic is the biggest crisis to hit the world since the 2008 crash, it is not the same thing. Yes, both created an uncertain future. Both saw an initial collapse of the global stock exchanges. And both saw governments intervening. But that’s really the only similarity. The larger financial services sector is far more secure today than it was in the aftermath of what happened in 2008. 

As for venture capital, some of the largest businesses of our generation were started and funded during that time. Some of the largest software infrastructure and development tools businesses were founded then. For example, Nutanix, MongoDB, Github, and Cloudera. And, many services businesses that revolutionized how work is done today—from Square, to Slack, to Dropbox and Glassdoor. The total market value of these 8 companies is over $30 billion. 

And in 2009...Uber was founded.

I’m eager to see what revolutionary businesses venture capital funds during this crisis. 

 

3. Private Equity players often state that they are not just about money. What is the nature of support that your firm has provided to investee firms to weather the current storm?

The most important thing we can provide, I would say more important than money, is to be there for our companies. To be available. To be both a sounding board, as well as a support system. To let them know they are not alone. In some cases, we have supplemented that with capital. But in every case, our capital is not the reason our founders have weathered this storm. And I can tell you today, every one of our founders have weathered it.  And they know they’re not out of it yet, but they also have a clear path now to move forward. It’s a good place to be. 

 

4. You have been an entrepreneur at heart. What attracted you to the Private Equity industry?

I wanted to give back to entrepreneurship something I didn’t get myself - support. There are many pools of capital out there. But very few of them are truly able to support a founder in any way outside of money and potentially a few introductions. My partners and I wanted to change that. We wanted to truly be available and knowledgeable enough on their company to be of help whenever needed. That’s what we strive for today. That’s what we rate ourselves on. And that’s what we continuously try to improve on.  

 

5. Please share with us more on the story behind Lightbox ventures and your investee firms. What makes you different from other Private Equity players in the market?

Our investment thesis has always been about building along with our portfolio companies and not just betting on them. Being entrepreneurs ourselves, we love building products and companies and understand the importance of growing and building a business with the right set of virtues, culture and financial foundation while creating something impactful and sustainable. So we get to know our founders early on and try and get operationally involved in the any way we can. We also enjoy working with consumer tech and tech enabled businesses that sell within India, to make a better India because it's not enough for a company to be able to generate value if they're not doing it in a manner that's actually benefiting us as residents of the country and we believe in the ability of technology to play a larger role in helping build the future of India.  

Having a concentrated portfolio makes it easier for us to do that effectively and that approach is what really separates us from the other players in the market.

 

 Source: Interview with Empoweredindia

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Earlier this year, COVID forced most businesses to change their foreword looking budgets and plans for 2020. Some businesses experienced an acceleration in their business operations while most experienced a deceleration. The companies focused on selling essential goods and services were able to double down on their growth while others were forced to slowdown or pivot in some form or another.

Keeping this in mind, we created a scorecard that will help assess how prepared your business is to thrive in a post COVID world.

What is this scorecard?

The scorecard is an assessment of a business on six key parameters that we believe will determine how a business is able to cope over the next 12 months. The six key parameters are: Online Presence, Essential vs Luxury, Provenance, Hygiene, Sustainability and Work from Home.

We recognize that every business is unique and every industry has its own challenges and will evolve differently. Hence, we would like to highlight that the scorecard is by no means a definitive indicator of the health of any business. It should be viewed as a tool that sparks some thoughts and ideas on how entrepreneurs and investors make their business more future proof. This scorecard is best suitable for consumer businesses and not SaaS businesses.

Six parameters and their weightage in the scorecard:

1. Online presence – In the past few months, online businesses have done extremely well as offline businesses remain shut. According to Redseer, in the first 6 months of 2020, the penetration of e-commerce has grown from 3.4% to 5.1%, an accelerated change in 6 months that earlier took more than 3 years to happen. Going forward, the expectation is that the habit of online purchases is going to stick which will only accelerate the penetration of online retail. So, if a company doesn’t have their product /service available online they will potentially lose out to their digitally enabled competitors.

Weightage – 25%

 

2.  Essential vs LuxuryWith household consumption going down and savings going up it is expected that a higher share of the wallet will be focused towards essential spends “need to have” rather than luxury spends “nice to have” products/services. So, it’s important to understand if your users finds your product/service an essential category or a luxury category.

Weightage – 30%

Essential Needs - Grocery, Medicines

Basic Needs - House, Education

Mix of Basic and Luxury – Soft Drinks and Juices, Clothing

Premium Category Spend - Branded apparel, Restaurant food, Cars

High Luxury spend – Vacation, Travel

 

3. Provenance – One of the fallouts of the COVID19 pandemic has been uncertainty around which cities and markets are under lockdown and disrupting supply chains. This has further translated to displacement of human capital creating a disequilibrium of supply and demand of labor in cities. In this pandemic, the government of India has initiated an increased push for India to be self-reliant i.e. increase manufacturing in India as well as promotion of local brands. In summary the disequilibrium in human capital, an increased push for local businesses and broken global supply chain will cause businesses and brands that are not made in India to be unfavorable

Weightage – 10%

 

4. Hygiene - Due to the current health crisis, hygiene has become the new security. Businesses that are able to ensure the highest level of hygiene across each phase of their supply chain will benefit from increased customer trust. Whether offline, online or omni-channel, businesses that maintain the highest level of hygiene and are transparent about these efforts are most likely to benefit.

 Weightage – 15%

 

5. Sustainability – Sustainability has been a buzz word for years now, with little or no change. But, post COVID, consumers will be more conscious about their emissions. Pre – COVID, no one believed that a global health crisis could ever take place, but looking at the impact of COVID, there is a growing concern in communities that the next potential crisis, which the scientists have been warning us about for a long time, is climate change. Hence, a belief that businesses providing consumers with a sustainable product/service will receive increased loyalty from the consumers.

Weightage 5%

 

 6. Work from home – With strict lockdown measures, businesses and consumers were forced to follow a Shelter in Place (SIP) protocol. This protocol has led to businesses being forced to adapt to a non-office environment. In the past few months, businesses have adjusted to it graciously, something that was never thought possible earlier. Furthermore, handful business have even declared a permanent WFH measure for some of their departments. Due to this trend, consumers will stay at home more often or will move to non – urban cities which will in turn affect businesses directly or indirectly in terms of consumption. For example: consumption on commutes, cars, and formal clothes.

Weightage – 15%

 

Consumer focused businesses:

We have assigned scores accordingly for each parameter below:

 

So, go on! Do give the scorecard a try and check the results for yourself!

 

Calculator:

 

 

What does the score suggest?

 

Note: A high score or a low score doesn’t guarantee the success or failure of the business. It’s just a benchmark to see where you stand and which factor you could improve or double down on.

To better understand this scorecard we have applied this scorecard to two of our portfolio companies – Nua and Dunzo.

Nua

Nua is a women's wellness direct to consumer brand that provides femcare products like sanitary pads.

 

Weighted Score for Nua:

Factors that the company can improve on:

  • The company currently has a disadvantage in having its product manufactured by international manufacturers. If possible, use Indian manufacturers to avoid stock outs and potential delay in shipments due to uncertain lockdowns.

Factor that the company can double down on:

  • Double down on its online sales channels to reach customers. As people in India have become comfortable with online shopping and incumbents in sanitary napkins industry lack an online presence, it gives an opportunity for Nua to reach a larger number of customers.

 

Dunzo

Dunzo is a hyperlocal delivery service that delivers anything you want, anytime and anywhere within a city.

 

Factors that the company can improve on:

  • Provide a more sustainable way for delivery of goods/services. Increasing electric fleet for delivery partners which will make it a sustainable and environment friendly business could increase loyalty among customers (more than it already has)

Factor that the company can double down on:

  • As Dunzo has become the go to option for delivery of essential goods/services for consumers because they maintain high hygienic conditions and are a convenient option, they can leverage this to reach and retain users on the platform.
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Lightbox
Company building and culture

An opportunity in crisis

Sid Talwar

Are private equity firms 2 faced? How does the financial service sector deal with challenges? Read on to find out:

Read more
Lightbox
Business models

What's your covid score?

Akshat Jain , Varun Varma

This scorecard is an assessment of a business on six key parameters that we believe will determine how a business is able to cope over the next 12-24 months. Do try out the calculator that we have built for you

Read more
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