InvestorQ : How is the start-up system likely to be impacted by COVID-19 in terms of PE flows?
Riya Dwivedi made post

How is the start-up system likely to be impacted by COVID-19 in terms of PE flows?

rhea Babu answered.
1 year ago

Start-ups are trying hard to cope with the impact of COVID-19 even as investors are likely to factor in risk premiums and re-evaluate valuation of ongoing deals. Duff & Phelps has pointed out that while deals may still happen, it could happen at much lower valuations and at terms that are more favorable to the investors rather than the start-ups.

Most Indian businesses have seen a chunk of their revenue streams erode rapidly and the start-ups have been no exception to this rule. In most cases, there could likely be a re-evaluation of valuation multiples. This is more so in the case of internet start-ups where the down-rounds are more likely to happen.

Most start up agreements has something called down-round protection rights which these investors might be executing. These arrangements making it a lot tougher for the start-ups to negotiate deals. A down-round is when start-up raises funds at lower than the originally agreed valuation just to ensure that the funds flow into the business in tough times.

Valuations are expected to drop by nearly 40% or more in case of most start-ups. Those with relatively predictable revenue streams would be less impacted by this value constriction. Most VCs and PE funds are trying to help their investee companies with additional equity infusions, bridge financing and other support to get through this crisis.

However, this action may be limited to existing investments only. For new start-ups and ideas, the crunch could be a lot harder. Start-ups may find it more difficult to raise funds from investors and the PE funds may even force consolidation to get better economics.