Moneyball: Orios’ Rehan Yar Khan On How Covid-19 Has Changed Lending, Digital Commerce

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“The sword of Covid-19 is not going to go away until the vaccine is ready — not just from a manufacturing perspective, but administered to billions of people,” – Rehan Yar Khan, managing partner, Orios Venture Partners.

Over the next two years, India is expected to go through a series of changes from multiple lockdowns possible and long-term containment zones in areas where the number of cases is high. These factors will have a domino effect across sectors, including travel and tourism, which could easily have revenue loss anywhere between 75% to 90% overall. This complete upheaval has also impacted everything in the retail space from stores to malls, events, movie theatres to pretty much anything people used to go out for. Here the revenue loss is expected to be close to 50% to 75%, according to many including Khan.

A serial entrepreneur turned investor, Khan brings 28 years of rich experience to his investments. He actively seeks to invest in innovative startups in the B2B, B2C and software space. But the question most VCs have at this point in time is where to invest as businesses everywhere deal with different challenges, and Khan believes investors do want to invest but there is a pause to rethink the sectoral focus.

Anything to do with going online, like offline businesses going online or being enabled to go online — that’s going to grab the investor’s attention. Grocery delivery, online gaming, SaaS, epharmacy, healthtech etc. Simply put, the other areas have become uninhabitable, added Khan and most investors will seek refuge in these sectors.

Khan’s Orios Venture Partners has backed companies like Pharmeasy, GoMechanic, Zostal, Boonbox, LetsMD among others. The firm has completed seven exits till date, including Exclusively, Pickingo and ePoise among others. Till date, the fund has made over 58 investments, where it has led 25 investments. Recently, the firm invested in a high-limit corporate credit card startup Karbon Card, which raised $1 Mn in funding.

Edited Excerpts:

Inc42: As a venture capitalist, how are you viewing the current Covid-19 situation? 

Rehan Yar Khan: We are very fortunate to be in the venture capital business. I think across the board, all my friends with startups and businesses have seen salary cuts and have stopped their business. However, in the venture capital business, we are immune from that to some extent. I mean, we still have places where we can invest in new ideas unlike public markets and private equity portfolios. Of course, we have changed our thesis to suit accordingly in the Covid-19 reality.

Inc42: According to a recent report, when it comes to funding, growth-stage startups were the worst hit. What are the other options do these startups have to raise capital — should they be looking beyond the VC ecosystem? 

Rehan Yar Khan: It is not much about VCs or non-VCs. I think this (Covid-19) impact on business is secular. Anything outside of the sectors that I mentioned earlier is hit globally. It doesn’t matter whether it’s public or private. During these turbulent times it is very hard to look for alternative sources of capital, instead, create viable business plans.

So, what are companies doing in such a situation? They are relooking, realigning their business, and a lot of them are laying off, where they are certainly shrinking their costs to try to match the loss in their projected business. In addition to this, there has been some sort of monetary relief which has been provided to Indian companies, however, it has remained with AAA companies. It hasn’t come down below AAA. So, we will have to see how that unfolds.

On the other hand, startups that have venture capital funds backing them are fortunate as compared to startups that don’t. As investors, we will continue to support our companies given that there is a new business plan. Otherwise, logically, what are we supporting?

Inc42: What about venture debt funding? Would that grow in the near future, given the lower risk involved?

Rehan Yar Khan:  Whether it is equity or debt funding, the question one should ask here is, what am I raising the capital for? That is, if you have a viable business plan, then you know, a number of investors will step forward to fund your startups. It doesn’t matter whether it is debt or equity, what matters is if you have a viable business plan.

For instance, Pharmeasy. The company grew 40% in the last one month, as it is selling medical and other essentials like sanitizers, masks, PPE etc.

This kind of company will surely attract all kinds of finances because investors will see it as a viable business for the next 24 months. Then, it depends on whether the company wants to raise equity or debt funding. That will completely depend on them.

Inc42: Since you brought up Pharmeasy, do you think there will be a single unified platform for ecommerce, which is into every vertical? Would that be something we could be heading towards given that everyone wants a piece of essentials? 

Rehan Yar Khan: If you look at Amazon, it has not really been able to enter the pharmacy space in the country. Not just in India, the company, however, has a strong presence in groceries and has done a good job with Amazon Fresh. I could be wrong, but I don’t think we will have this one mega platform for all in India.

Inc42: What about travel and tourism space, we were going through your portfolio companies, and came across Zostel, we are just curious to know what will happen to the business once the lockdown is over? 

Rehan Yar Khan: Currently, we have lost 95% of revenue because nobody is staying in hotels, and nobody is travelling. Maybe, it is going to be very tough for the entire travel and tourism sector. If you check out my blog, I have said they would lose 90-95% of revenue for the next one year. That is our thesis.

For example, in China, I recently stumbled upon a report that Marriott Hotels are now generating revenue at 20%. They have come back to 20% of revenue. So, I could be wrong also, but at the same time, I don’t think they’re going to be back to 75% as they were in 2019.

Inc42: What about other sectors that are profitable? What is your Covid-19 investment thesis for these growth areas?

Rehan Yar Khan: Healthcare and education are the two evergreen sectors. I think those companies will grow unaffected. Also, online pharmacies, we have seen them benefiting from lockdown.

Our thesis is that if lockdown is keeping Covid-19 down. Logically, if you lift the lockdown, then the infection will also grow again because intermingling will resume. In this type of situation, I think online businesses, particularly the online-to-offline and vice versa will boom if the lockdown continues sporadically the next 12 months.

Inc42: In one of your tweets you had mentioned that there will be fear of China firms taking over Indian companies. And a few days later, the Indian government announced the new FDI rule? What’s your take on it?

Rehan Yar Khan: At present, countries where businesses have either received bailouts like the US or Europe, and China which is the hardest working nation in the world are going to be very rich as the Covid-19 situation has been nullified in the country.

In countries like India, Pakistan and Bangladesh, however, there have been no bailouts before the stimulus, and, Chinese companies might take advantage of the situation and may target wealthy companies and acquire them. We will be seeing a lot of takeovers that will be happening in the next 12-24 months. However, the new FDI rules kind of complicate that process.

But, the question is, how long can you block China? Because India is dependent on China for money. Currently, the China Development Bank, which is almost a World Bank replacement as it is heavily funded. India’s fiscal situation, on the other hand, is also so poor that the ministry has to eventually raise money from somewhere. India can’t turn to the IMF, because they are taking care of the US and European countries.

Inc42: If you have to peer into a crystal ball and find out, where do you see the money coming into the market from, given these restrictions on FDI? What about the stimulus and policy for incentivising investments in the market?

Rehan Yar Khan: The RBI has tried to create some money via monetary policy, where they give money to the banks and ask them to buy the bonds. The only problem is the banks are buying AAA bonds. In other words, only 800 big companies will be benefited from this, be it corporate tax reduction and all that.

It is a big ball of tangled-up wool — the policies and regulations.

Companies below that have not been benefited. I don’t know where the money is going to come from? VCs will not invest in startups that are not going to generate revenue, and banks still will not lend to SMBs that don’t have cashflow. That is why I said India will have to go to all these Chinese banks so that they bail out the MSME sector in India.

Inc42: How do you foresee the consumer space to move in the sparsely populated areas, compared to rural areas?

Rehan Yar Khan: I don’t know about shifts, but certainly there will be reduction in consumption. If you see Delhi-NCR, Mumbai, Bangalore and Calcutta combined, these contribute close to 40% of India’s GDP. Mumbai alone on the first weekend of any movie, the city generates close to 50% of the revenue as movie culture is very big in such a densely populated city. Besides this, the auto industry and restaurants will suffer the most due to discretionary spending.

Inc42: What about fintech space, particularly lending —  will it also grow with the consumer capacity and spending impacted due to Covid-19? 

Rehan Yar Khan: I don’t think fintech is benefited from this. I think fintech has been a loser from this because defaults in credits are certainly going up in the coming days. All your B2B fintech companies, they have a lot of defaults. Going forward, they will have more defaults as companies do not have revenues coming to pay their loans back. I think 90% of their portfolio must be hurting.

In the consumer credit side, companies are going to suffer because of the same reason as there have been salary cuts and layoffs. Clearly, all these companies that were blue-collar lending, they are going to be in deep trouble now. They might even perish, trying to survive.

If we carefully examine fintech, we can categorize it under the following bucket — B2B lending, prime lending, subprime lending and blue-collar lending.

Prime lending to an extent is going to be okay. There will be some default, but if you are getting 5% delinquency, you may get 20%. However, in other spaces, you may be talking about 75% delinquency and more.

In subprime lending, the whole thing which the companies are saying that they are using an algorithm to go beyond CRISIL is going to suffer.

Inc42: Do you think traditional sectors or banks will bounce bank in the lending and credit access market? 

Rehan Yar Khan: Again, I don’t think they are going to bounce back. All the lenders, irrespective of the audience that they serve are going to be negatively affected.

For example, if you look at banks that were lending to realtors to make apartments and complexes, they are not getting their money back anytime soon because nobody has the money to buy anything.

Apartments are a clear roadblock. I think anybody who has EMIs to pay will be in a dilemma, and banks will have to restructure their loans, and there may be defaults. In addition to this, there are so many people in India who are self-employed in the MSME sector, they are not generating revenue because factories are shut and people have not received salaries. Imagine, you have a housing loan and you received a salary cut.

Firstly, roti kapda dekhna hai, makaan toh baad main aayega (people will look at food and clothing expenses over rent). There is going to be a lot of pain in the lending space in the next two years.

With inputs from Nikhil Subramaniam, Senior Editor at Inc42 Media

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