THE IMPACT OF COVID-19 ON GLOBAL STARTUP ECOSYSTEMS- PART 3

• Resources
• July 08, 2020

SURVIVAL OF INDIAN START-UP ECOSYSTEM AT STAKE DUE TO OUTBREAK OF CRISIS:

In the times where people need to stay indoors and away from each other, the challenges start-ups face, particularly the ones with a high physical component, are only increasing. The world posts the coronavirus pandemic, where research for cures is on the peak, companies like Google and Zoom are coming through for entrepreneurs and start-ups, allowing them to leverage their tech solutions.

The Indian start-up ecosystem – hitherto heralded for its rapid growth – is facing its biggest challenge yet, with its very survival at stake due to the COVID-19 crisis, which showed that 70 percent of start-ups have less than three months of cash runway due to this COVID-19.

The industry body’s month-long e-survey, which was conducted to study the impact of the COVID-19 pandemic on Indian start-ups, found that around 40 percent of start-ups have either temporarily shut down operations or are on the verge of shutting down.

“The growth story of Indian tech industry, specifically the start-up ecosystem, has been often repeated with many countries emulating its success mantra… Out of the blue, this flourishing growth saga has suddenly been hit by a roadblock: the COVID roadblock. While governments have been working diligently to protect and save human lives, businesses have been hit and small businesses and start-ups have been the most affected,” says Debjani Ghosh.

B2C start-ups worst hit

Early-stage and mid-stage start-ups are the most impacted, particularly those in the business-to-consumer (B2C) space, revealed the survey, which received responses from more than 250 start-ups across all stages. Within the B2C space, a third of these start-ups have a runway of less than three months, it said.

In fact, according to the survey, around 60 percent of B2C start-ups face closure as revenues plummeted to near-zero levels after businesses were forced to remain shut during the nationwide lockdown aimed at curbing the spread of the virus.

Many start-ups have been forced to undertake severe cost-cutting measures, such as laying off staff, slashing salaries, and ceasing all expansion plans and projects, in a bid to preserve cash and have a longer runway in an uncertain operating environment there in the many start-ups. 

Impact on start-up revenues

As demand came to a standstill during the lockdown, start-up revenues have been hit hard, forcing many businesses to either shut down or transform their business models altogether to withstand the crisis.

According to the survey, over 90 percent of start-ups face revenue declines. The decline in revenues is expected to be as steep as over 80 percent for at least 34 percent of start-ups.

For the remaining start-ups (over 60 percent), the decline in revenues is expected to be more than 40 percent.  Travel and transportation start-ups expect revenues to decline by more than 40 percent, as changes in consumption and perception of these industries will mean that business activity in these industries will not return to pre-pandemic levels.

The lone bright spots are the EdTech sector, where 14 percent of start-ups are seeing a growth in revenue, and the business-to-business (B2B) space, where revenue declines are expected to be less severe.

Start-up funding impact

But it’s not just revenues that are taking a hit. The impact on start-up funding is also being felt across sectors.

At least 65 percent of start-ups are facing “significant negative impact” on funding due to the COVID-19 crisis, with most early-stage start-ups facing a major funding crunch. 

“Funding shortage is being felt by most start-ups and can affect long-term sustainability,”

Earlier this year, many prominent venture capitalist firms such as Sequoia Capital, Accel, and LightSpeed sounded a cautious note to Indian start-ups, warning that a tough and uncertain macro environment would make for a difficult funding environment.

Among sectors, aggrotech and fintech start-ups are the worst hit when it comes to funding, while healthiest is emerging as the only sector witnessing a more favourable funding environment. To combat the funding crunch, start-ups are resorting to several measures such as seeking government support, loans from banks and non-banking financial institutions, and capital infusions from existing and new investors, the survey showed. 

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Government support needed

Two-thirds of all start-ups surveyed believe that the COVID-19 impact will last up to a year, with a majority seeking immediate government support in the form of favourable policies, easing regulations, partnership opportunities, and reimbursements on immediate fixed costs, among others.

India’s revised FDI policy likely to hurt start-up investments The Government of India has recently tweaked its Foreign Direct Investment (FDI) policy in a bid to limit “opportunistic takeovers/acquisitions of Indian companies” amidst the pandemic. As per the revised guidelines, any investor of a nation that shares land borders with India will now require government approval for making any investment in India. While the move to curb hostile acquisitions is well-intended, it can create an addition funding obstacle for home grown start-ups.

This is because China is one of the biggest stakeholders in the Indian start-up ecosystem. Industry reports suggest that 18 out of 30 Unicorns in India are backed by Chinese investors and VCs, including the likes of Tencent and Alibaba. China alone has made a total investment worth over $8 billion in Indian companies, which outweighs all other neighbouring countries combined. Now that it has been mandated for all Chinese investors to get government nod, larger funding rounds will likely take longer than usual to close. It is also expected that funding will dry up, adding to the woes of start-ups that are already struggling with cash flow.

With many countries like the US, UK and Canada announcing massive economic bailout plans to protect their businesses, economies and job losses, Indian start-ups now fear that unless speedy relief measures are announced by the government, many of them may not survive this economic downturn in the face of global recession in the all over world.

Growing investor interest in certain sectors

The COVID-19 crisis has brought a change in start-up investment patterns. Venture capital firms are shifting their focus from tech-centric start-ups to the ones operating in sectors such as FMCG, online grocery delivery, home entertainment etc. Apart from that, start-ups in EdTech, FinTech and cyber security are witnessing an increasing user demand, which in turn is luring investors. Also, the government itself is offering Indian start-ups $130K to develop an encrypted video conferencing solution after that can work on multiple platforms.

The pandemic has undoubtedly affected the start-up funding scenario in India, but it has also created new opportunities for start-ups that can adapt to the current environment. Some companies are already showing trend-defying growth, which is giving a ray of hope to VCs and angel investors. While it is too early to gauge the long-term impact of coronavirus, we can expect a positive turn towards the end of the year. However, in order to achieve that, a concerted effort is required from the government along with VCs and corporates.