Note from the Manager

Sandeep Murthy
3rd September 2020

COVID-19 made its severity felt during this quarter causing widespread lockdowns and an already major dent in the economy. To prepare ourselves for the pandemic’s far-reaching consequences, we decided to take a look at where these implications might trickle down to, including the inevitable recession

They say there are decades where nothing happens, and there are weeks where decades happen. This quarter seemed like the latter- whether it was the pan-India lockdown which kicked off Q2, oil futures trading at a negative price, Big Tech and global marquee investors lining up to get a piece of Reliance Jio almost every other week, or India banning 59 Chinese apps- these last 3 months have truly seen it all. It was a (virtually) eventful quarter for us at Lightbox too. Having smoothly transitioned our entire team to work from home, we were successful in hosting several events for us and our portfolio companies- from understanding ‘Force Majeure’ to realizing the capabilities of doing business via WhatsApp Commerce to drilling down into ByteDance’s advertising strategy- we did it all.

Deal flow in Q2 2020 decreased significantly. Due to the ongoing lockdown on account of COVID-19 , we expect deal flow to remain at a relatively low level in the foreseeable future until regular work functions return to normal. We observed that metro cities being impacted significantly by COVID saw the largest drop in deal count averaging at 40% QoQ decrease. There are a few interesting trends we observed this quarter- we saw a significant increase in deals in the Messaging, News, AgriTech, EdTech, and E-Commerce space. Due to the on-going lockdown and a sharp drop in travel, we saw a big drop in deals from the Jewelry and Hospitality sectors.

Q2 2020 saw regions across the globe continuing to grapple with the challenges associated with COVID-19 - including economic turbulence, sudden spikes in unemployment rates, restrictions on travel and movement, and the ramifications of the continued shutdown or slowdown of many sectors. As countries began to re-open their economies, both VC investors and startups worked to understand the ‘new normal’ and how it would affect business operations.

Globally, venture funding for Q2 2020 was not as dire as we expected, but it showed a definite decline from the previous years. Overall, across all fund stages, total global venture investment for 2020 tracks at $129 BN for the first half of the year. This amount is down 20% year-on-year from 2018 and 7% down from 2019 . Digging deeper, out of that $129 BN, Q2 saw an investment of $69 .5BN across all funding stages. This is up 17% quarter-over-quarter and down only 2 % year-over-year. These encouraging numbers are courtesy of the massive investment raked in by Reliance Jio- a whopping $20.3BN- by a long list of Big Tech and global PE firms. If we remove Jio from the second quarter–given the voluminous amount of funding to one company–the numbers look vastly different. Funding would be down by 9 % quarter-over-quarter and 23% year-over-year.

Reliance Jio has truly been the talk of the town this quarter- attracting 13 global investors in 60 days. Amassing an investment of $20.3BN by parting with 33% equity, they even managed to make the company net debt-free. To understand the implications of this $20BN for Jio and the broader technology market in India, we decided to dive deeper. Reliance Industries is not only the largest and most profitable company in India, with a market cap of $160BN and revenues of $88BN, but it has its hands in multiple large scale industries: from retail and telecom to oil and gas, to petrochemicals and media. Although RIL is a powerhouse of the Indian industry, it has built Jio Telecom infrastructure on the back of debt. As of earlier this year, RIL had $44BN in gross debt, and a large annual interest burden (roughly $3BN). Despite its dominance, RIL was facing an increasingly difficult problem: paying down their interest burden in the face of declining margins in its legacy businesses.

To combat this growing debt burden, Mukesh Ambani, CEO of RIL, opened up RIL to partnerships and proclaimed that RIL would be net debt-free by 2021. Riding on this proclamation, Jio Platforms announced 13 equity deals from international blue-chip investors. Not only do these investments prove to the world that Jio is a global technology leader, but it also illustrates that they are capable of taking on what RIL claims to be Jio’s global peers: Alphabet, Amazon, Tencent- all of which are debt-free companies. With the latest investment coming from Google, we now see the full picture. Jio, with its Facebook and Google partnerships, captures the entire Digital India Consumption stack: connectivity, content, communication, payments, and commerce. Each layer of the stack plays a pivotal role in capturing consumption data. However, each layer is not created equal, and some are relatively more important to capture because of their monetization potential. You can read our comprehensive take on this topic here.

COVID-19 made its severity felt during this quarter causing widespread lockdowns and an already major dent in the economy. Apparently, its just getting started. To prepare ourselves for the pandemic’s far-reaching consequences, we decided to take a look at where these implications might trickle down to, including the inevitable recession. Owing to COVID-19, consumption habits have drastically changed, thus impacting business plans globally. The seemingly mundane everyday activities that we took for granted like going to work, schools, and entertainment venues have come to a standstill as these now posed a potential risk to life. Given the new realities, companies have seen consumption going down, individual savings going up, and supply of goods and services becoming uncertain due to global supply chain issues, all of which have led to an increase in insecurity amongst the various stakeholders in the economy.

We decided to take a moment and look back on the last two recession to find some similarities and solace: the crash of 2001 and the Global Financial Crisis of 2008 . Interestingly, we learned that the stock markets (S&P 500 Index) can take a long time to recover to the pre-recession levels – S&P took 7 years and 5.5 years to reach the pre-recession levels after 2001 and 2008 recessions respectively. But, when the S&P did reach the pre-recession levels, the consumer staples and consumer discretionary stocks not only recovered the fastest but outperformed all the other sectors. When it comes to the current pandemic driven crisis, we have observed the markets tumbling the first few months by ~35%. Since then, it has picked up driven solely by the technology sector - as of July, the S&P 500 is up 2% year-to-date (YTD). Facebook, Amazon, Apple, Microsoft, and Google collectively are up 35% YTD, whereas the rest of the remaining 495 companies collectively are down 5% YTD.

The markets have spoken: all the consumer spending is directed towards technology- driven companies. Due to this, we believe that India will take a longer time to recover than the developed countries as the heavyweights in India are made up of the financial services sector as compared to the strong technology portfolio in other developed countries. Nonetheless, we fully expect that coming out of this pandemic and recession, we will not only expect to see the technology sector to play a far more important role in the economy but also expect a sharp rise in creativity and innovation. This light at the end of the tunnel keeps us hopeful and optimistic even during these uncertain times. Here is our detailed view of COVID-19 and its implications.

The pandemic has been especially brutal for consumer-facing industries like travel, hospitality, retail, and food services. They have been facing the brunt of this impact and this isn’t the kind of ‘disruption’ entrepreneurs would have hoped for. COVID-19 has usurped not just businesses, but industries as a whole, forcing them to reevaluate their business models. Along with a sharp decline in consumers and revenue, companies have also been struggling to raise money. In these times, for a lot of these industries, franchising has been an attractive business model to turn to- it allows for expansion with virtually no contingent liability and most importantly, without the risk of debt. In this quarter, we also tried to explore in detail what franchising in the times of COVID-19 looked like.

While franchising may seem straightforward, like all good business models, it has its subtleties. We had two major takeaways from our deep-dive: Firstly, franchises are a brilliant way to enter a foreign market at a much cheaper cost, while also being equipped with all the local know-how. Secondly, franchising works best when your business has a product to sell, rather than a service. As to the future of franchising, we see this going two ways. Owing to the consumers becoming hyper-aware about hygiene and a steady decline in consumption, physical stores will become less popular, leading to an increase in cloud kitchens and warehouses. This decreases the Capex required and thus, the company might just own and operate all the stores themselves. Going down a different route, access to capital is getting tougher as people are financially constrained- they don’t have enough cash to start their own stores. Franchising, as an alternative form of capital acquisition, makes it a more attractive option. You can read our nuanced take on Franchises here.

To wrap up, a lot happened this quarter- all of us went under lockdown to work remotely, we virtually hosted a bunch of insightful workshops and events for our portfolio companies, we deep dove into some of the major trends and understood their implications on the Indian start-up ecosystem, thus strengthening our investment thesis. In this coming quarter, we’re trying to understand the Social Consumer Apps space and what the departure of ByteDance from India entails and the impact of COVID-19 on the Fitness industry.

Look forward to our thesis on the Water Management industry, a space deeply intertwined with Lightbox’s core investment thesis- to invest in business models that are on the right side of the environment and social factors.