COVID-19 impact: Start-ups on a declining spree; 30% halt ops

Published: May 20, 2020 2:15:27 AM

Due to the current market disruption, investors will take a sharper call on the kind of business models they would want to support, analysts maintain.

Further, around 70% start-ups are having a cash runway of less than three months, and the most affected of the lot are the early stage and mid stage start-ups.Further, around 70% start-ups are having a cash runway of less than three months, and the most affected of the lot are the early stage and mid stage start-ups.

By Srinath Srinivasan & Asmita Dey

Like several other businesses, Covid-19 has hit hard even the Indian start-up ecosystem and the situation is nothing less than grim. Around 90% of the start-ups are facing a decline in revenues, while 30-40% are temporarily halting their operations or are in the process of closing down. Further, around 70% start-ups are having a cash runway of less than three months, and the most affected of the lot are the early stage and mid stage start-ups.

These are the findings of a month-long survey undertaken by Nasscom to gauge the impact of the virus on the start-ups.

However, as Nasscom says, all is not all doom and gloom “as more than half of the start-ups are looking to pivot to new business opportunities, diversify into growth verticals like healthcare, and enhancing focus on emerging tech like AI, IoT, and Cloud”.

Says Debjani Ghosh, president, Nasscom, “It is a known fact that historically such downturns have also led to business disruptions and transformations which have opened up a plethora of opportunities to tenacious entrepreneurs. Rightly so, many Indian start-ups have joined forces to create solutions that would help people to survive and cope with the pandemic and its impact on day-to-day life.”

As part of its recommendations it has urged the government to include access to working capital, easing compliances and fiscal policy and funding support, for the start-ups.

According to Nasscom, the Indian start-up ecosystem continues to be the third largest tech start-up ecosystem in the world, being the foundation of India’s innovation story, with over 9,300 tech start-ups, providing direct employment to over 4,00,000 people.

Agritech and fintech start-ups have failed to raise the same level of funding they did a year ago and over 80% of them are facing a funding crunch. Over 90% of start-ups in travel and transport industries have faced challenges in scaling and business expansion. On the brighter side, start-ups in health-tech and ed-tech have seen positive growth, the report says.

Analysts expect little big-ticket funding for start-ups this year. A fair number of term sheets were pulled back between mid-February and March end, Atit Danak, principal at Zinnov Consulting had earlier told FE, “The risk capital is available but the risk parameters have changed,” Danak had said.

Venture capitalists could stay away from new ventures altogether while cautiously supporting the existing investments until the sentiment improves sometime in December or early next year, according to analysts. The strategy surrounding merchandise too could change in the post Covid-19 world with a greater focus on groceries rather than electronics.

Due to the current market disruption, investors will take a sharper call on the kind of business models they would want to support, analysts maintain. “A considerable number of start-ups in the country have weaker business models but they managed to get funding in a boom market. Weaker businesses which were hoping to get some time to build on their strength are the ones that will get impacted,” said a managing director with a top PE firm.

However, sectors like ed-tech were doing well given the rise in digital adoption and the pandemic will only accelerate the process.

“Going ahead, the start-up sector is expected to see two trends ? businesses that are doing good will get the support of VCs. In fact, a lot of internal rounds of capital are underway but investors will definitely “raise the bar” when it comes to funding marginal businesses,” the person said.

Consolidation will be another key trend for the sector. “Some of the larger companies who have more capital might like to buy out some young tech businesses and integrate them into their business. That can also happen,” the fund manager added.

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