In the face of bleak realities of the lockdown, ongoing deals were expected to hit pause but they instead rushed to closure with ferocity. What’s more promising is that funding and deal count are expected to surge even higher for 2021, signalling a great year for lawyers in the venture capital space.
Looking back at 2020
When India closed its borders and went into a strict lockdown in March 2020, it created an air of uncertainty regarding the nation’s growth. High performing start-ups were suddenly dealing with plummeting revenues with e-commerce facing zero revenues during the first few months of the lockdown. Many start-ups had to shelve plans to raise external funding with meaningful mark-ups. Key regulatory changes that restricted foreign investment from countries that shared land borders with India was an added complexity to navigate. Particularly those trying to survive with follow-on funding from existing investors on the cap table were hit by the restriction.
In the face of such bleak realities, ongoing deals were expected to hit pause but they instead rushed to closure with ferocity. New deals in Q1 were being evaluated albeit cautiously and slowly. The next two quarters from July to December more than compensated for the temporary lag in deal-making. All players from founders to law firms were unexpectedly busy closing deals of all sizes – from seed stage to unicorns. While edtech stole the show (with Byju’s and Unacademy’s big ticket fund raises and UpGrad’s strategic acquisitions) several sectors got their fair share of action from virtual reality (Avataar.me’s fund raise from Sequoia Capital) to start-ups that help local businesses create online stores (Lightspeed Venture Partners and Matrix Partners investment in in Dukaan).
Interestingly, while the number of new start-ups declined (falling from approximately 3,500 in 2019 to around a mere 1,000 in 2020), 2020 saw a record-breaking number of eleven new unicorns. Overall, the Indian start-up ecosystem saw 924 deals close in 2020 (14 per cent higher than 2019) with deal value of USD 11.5 billion. These are healthy figures to contend with, especially against what we faced in Q1 of 2020. What’s more promising is that funding and deal count are expected to surge even higher for 2021 signalling a great year for lawyers in the venture capital space.
VC Lawyers – the Way Forward
Against the background of these promising projections for the surge in venture capital deal-making, lawyers assume a significant role in turning these to reality. We’ve identified three key characteristics that will help us scale and meet client expectations - keeping it simple, white over red flags, and staying present.
Simplifying Complexity: Over the years we’ve come to realise that 100 pager agreements are rarely necessary for large ticket deals let alone early stage venture capital funding. It is critical for us to shift to simplified, standardised and concise documentation that protects parties from actual risks. There is certainly a need to move away from seemingly grave but largely academic protections such as extensive indemnities, especially for early stage companies with lean operations and few employees.
Moreover, this simplicity should also extend to communication during the course of the deal, especially negotiations. In our experience, breaking down key legal concepts for clients who, being outside the legal realm, are not always well-versed with legal jargon is crucial to effective lawyering.
Further, while clients do not always experience how different clauses play out in the life of an investment, lawyers are specialists who are engaged when disputes arise and these disputes often stem from unfortunate loopholes in the documentation. Instead of parking too many issues to be resolved directly by clients (which may also sour investor-founder relationships), lawyers should ideally draw from their experience to determine what’s worth fighting for and where it might help to meet mid-way in the first instance of a dispute.
Risk Assessment :Given the fast paced nature of VC transactions, lawyers will need to be more pragmatic while identifying issues and assessing risk levels as part of their diligence. Even when a long list of issues is revealed through our thorough diligence, we must not lose sight that investors are keen on proceeding with the transaction with their exposure mitigated if not completely resolved, and therefore should steer clear of applying a one-size-fits-all approach when solving these issues. While not all problems can be easily remedied, having genuine enthusiasm to see the deal to closure brings out a collaborative spirit to resolve issues – in the midst identifying and waving red flags through the life of the transaction, we must remember to raise white flags too.
Staying Present: Most importantly, there is utmost value in being present, especially so while we’re all working remotely through this pandemic. Albert Mehrabian, a pioneer researcher of body language back in the 1950's, found that the total impact of a message is about 7 percent verbal and 38 percent vocal (including tone of voice, inflection, and other sounds) and 55 percent nonverbal. While many corporate professionals have transitioned easily from in-person meetings to video conferences, we’ve noticed lawyers (ourselves included) are still hesitant, almost reluctant, to turn on video on negotiation calls. Possibly because lawyers use some of this time to multi-task to keep all clients happy given that everyone has a number of live transactions at any given point.
As we continue to close deals of all ticket sizes entirely remotely for at least the foreseeable future, reading the room is fundamental to steer negotiations with favourable outcomes. Our key learning here has been that the only way to achieve this is to recalibrate our minds. This is an impossible goal to achieve if we continue to disable video and multi-task on calls, simultaneously reviewing drafts, raising invoices, filling timesheets and the like.
Archana Rajaram is Founder & Managing Partner, Rajaram Legal. She advises several venture capital investors in their investments and exits.
Priya Makhijani is senior associate at Rajaram Legal.