Covid-19 & Indian Start-ups
By Tanuja Pandey
Abstract
The pandemic has been a shock test to almost every dimension of the worldwide economy and this article attempts to draw the state and resilience of the Indian start-up ecosystem before and during this infamous period. The second decade of the 21st century was reported to witness an impressive growth in the total funding raised by the start-ups especially in 2019. The annus mirabilis was soon seemingly turned into annus horribilis as India went for a nationwide lockdown on March 24, 2020. This paper presents, following an in-deep study, the overall picture of the Indian start-up ecosystem over this timeline.
1. 2019: The Year of Indian Start-ups
The year 2019 had a glamorous and splendid array of events in the start-up sphere of India ranging from new companies getting established, major acquisitions, hike in the number of new investors to unicorns and soonicorns dazzling throughout. A 25 times growth from a mere $550 million in 2010 to $14.5 billion in 2019 was witnessed in terms of the total funding raised by the start-ups as per the report published by Tracxn.
The annus mirabilis can be summed in the following infographics:
2. COVID-19: The ominous advent
The value of investments in India were reported to have decreased from $1.73 billion in March 2019 to $0.33 billion in March 2020, a decrease of approximately 81.1%. Between mid-February and the end of March 2020 a number of investors had stepped back from any further investments. So, finding funding had become one of the biggest problems for start-ups, which had caused severe cash flow problems. COVID-19 in months proved to be a fatal force for the start-up ecosystem and amidst this Sequoia released a note that provided a very insightful set of advices on how to maintain the health of a firm while managing any potential commercial ramifications arising in response to events like lockdown and economy shutdown. The note read as follows:
…many companies in frontline countries are facing challenges as a result of the virus outbreak, including
1. Drop in business activity. Some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.
2. Supply chain disruptions. The unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions, but remain at risk due to cascading economic effects.
3. Curtailment of travel and cancelled meetings. Many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected. It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While The Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.
We suggest you question every assumption about your business, including:
1. Cash runway. Do you really have as much runway as you think? Could you withstand a few poor quarters if the economy sputters? Have you made contingency plans? Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences.
2. Fundraising. Private financings could soften significantly, as happened in 2001 and 2009. What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? Could you turn a challenging situation into an opportunity to set yourself up for enduring success? Many of the most iconic companies were forged and shaped during difficult times. We partnered with Cisco shortly after Black Monday in 1987. Google and PayPal soldiered through the aftermath of the dot-com bust. More recently, Airbnb, Square, and Stripe were founded in the midst of the Global Financial Crisis. Constraints focus the mind and provide fertile ground for creativity.
3. Sales forecasts. Even if you don’t see any direct or immediate exposure for your company, anticipate that your customers may revise their spending habits. Deals that seemed certain may not close. The key is to not be caught flat-footed.
4. Marketing. With softening sales, you might find that your customer lifetime values have declined, in turn suggesting the need to rein in customer acquisition spending to maintain consistent returns on marketing spending. With greater economic and fundraising uncertainty, you might even want to consider raising the bar on ROI for marketing spend.
5. Headcount. Given all of the above stress points on your finances, this might be a time to evaluate critically whether you can do more with less and raise productivity.
6. Capital spending. Until you have charted a course to financial independence, examine whether your capital spending plans are sensible in a more uncertain environment. Perhaps there is no reason to change plans and, for all you know, changing circumstances may even present opportunities to accelerate. But these are decisions that should be deliberate.
Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”
A distinctive feature of enduring companies is the way their leaders react to moments like these. Your employees are all aware of COVID-19 and are wondering how you will react and what it means for them. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action. Avoid this trap by being clinically realistic and acting decisively as circumstances change. Demonstrate the leadership your team needs during this stressful time…
3. COVID-19 and the lockdown: A major challenge
The start-up sphere was severely hit by the dawn of the pandemic and the following infographic by TIE Delhi NCR and Zinnov presents a perfect encapsulation of it.
A 48% YoY (Year-on-Year) decline in funding and 37% YoY decline in number of deals in CY (calendar year) Q2 2020 was witnessed. Additionally, less than 50 start-ups raised their first round of funds in Q2 2020 and there was a sharp dip in percentage share of total funding for B2C (Business to Consumer) start-ups from 65-70% in Q1 2020 to 30-35% in Q2 2020.
Furthermore, the pandemic's complexity had mixed effects on the various sectors.
4. Antifragility of the ecosystem – A quick response to the pandemic
The Indian government used a series of strategies to tackle COVID 19 and related problems ranging from innovatively curbing the spread of the virus to promoting policies for the aid of the start-up ecosystem.
The ecosystem, led by investors and start-ups, formed ACT (Action Covid-19 Team) to address COVID-19 challenges by providing INR 100 crore corpus grant fund to support ideas combating the deadly virus. Reportedly, ACT provided a total number of 90 grants, supported 54 unique companies by providing funding and donated PPE kits worth more than 15 crore to frontline workers. The splendid dynamic entrepreneurial activity and efforts can be summed up through the following infographic by TIE Delhi NCR, Zinnov.
5. Unparalleled rebound
The year of nationwide lockdown witnessed 11 additions to the pool of Unicorns. Investments recovered to 98% of pre COVID-19 levels in Q3 2020. Ed-tech was the top funded sector in Q3 2020 with 40% of investments going towards it, followed by Enterprise tech, BFSI and Gaming sector which cumulatively raised more than $800 million in Q3. Around 75-80% of total funding in Q3 2020 was raised by B2C start-ups compared to 30-35% funding in Q2 2020. Primarily on account of large ticket investments in start-ups such as Byju's, Dream11, Unacademy etc. Indian start-up ecosystem is expected to be competitive and given recent track-record India is expected to have 100 strong Unicorn pool by 2025. Overall, the start-up ecosystem is expected to grow at 8-9% CAGR over the next five years to follow 2020. A very insightful analysis of the rebound was brought out by DataLabs, Inc42 under the title, “The Uturn Creative Destruction and Advent of New Age Economy”.
Schumpeter's gale also known as the gale of creative destruction argues that a process of "industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one." In today's context it means that age-old business sectors will give way to new-age tech businesses to flourish. Covid-19 has fueled a change in consumer behaviour at an unprecedented scale - things that take decades have happened in a matter of weeks and this has catalysed mainstream growth in India for tech sectors like ecommerce, hyperlocal deliveries, supply chain and logistics, digital entertainment, content and media, and enterprise tech. Some fundamental changes which were introduced during the pandemic are expected to prevail in the post-pandemic market as well. As a result, the rising sectors will continue to get substantial traction and are most likely to replace their non-tech or traditional counterparts in the near future. The shift in market dynamics will also subsidise the unemployment and GDP loss caused by the sudden disruption of sectors such as – retail, commercial real estate, restaurants and others. The only question which we need to take into consideration is how effectively the government is going to facilitate the transition and embrace the change, this is a crucial determinant for a V-shaped recovery of consumer demand in the economy
Albeit industries like automobile, fitness and wellness, travel and hospitality, logistics, real estates and construction witnessed the worst hit the overall growth was reported to be driven primarily on account of increased policy support, broadening adoption of digital technologies and increasing acceptance of entrepreneurship as a career by individuals,
References:
Tracxn India-tech-factsheet, 2019:
TIE Delhi NCR and Zinnov, COVID-19 and Antifragility of Indian Start-Up Ecosystem
DataLabs by Inc42, COVID-19 Start-up Impact Report
Business Standard article, Indian start-ups raised a record USD 14.5 billion: https://www.businessstandard.com/article/companies/indian-start-ups-raised-a-record-14-5-bn-in-1185-funding-rounds-this-year119122700061_1.html
The Hindu, Businessline.com :
Mint, Start-ups face slump in sales for the first time amid lockdown: https://www.livemint.com/companies/start-ups/startups-face-slump-in-sales-for-the-first-time-amidlockdown-11585937417458.html
Financial Express, Funding for e-commerce could slow to a trickle: https://www.financialexpress.com/industry/funding-fore-commerce-could-slow-to-a-trickle/1933506/
Mondaq, India: Impact Of COVID-19 On Start-ups: https://www.mondaq.com/india/operational-impacts-andstrategy/949762/impact-of-covid-19-on-start-up
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