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Will startups survive the havoc caused by COVID-19 pandemic?

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Startups are facing unsurmountable challenges that have posed a threat to the very existence of these businesses

Rama Moondra: With over 2 crore cases and 7.36 lakh deaths, the coronavirus pandemic has wreaked havoc across the world. Even the best of economies are struggling to counter the social, economic, and health impacts of the pandemic. The travel ban imposed by several countries has added to the chaos, with businesses hit real hard.

Not just the MNC’s and big corporates, even startups are facing unsurmountable challenges that have posed a danger to the very existence of these businesses. The discomfort and unpredictability among startups have risen exponentially—a phenomenon not limited to just India. With resumption of normalcy still a far-fetched dream and consumer behaviour going haywire, it is nothing short of a catastrophe for startups.

Managing funds in such a volatile market is another challenge for these new-born businesses, with many expecting the turbulence to continue for a long period as has been predicted by many industry surveys.

So, is it true that only MSME or product based startups are facing the heat? In order to answer this question, we need to understand that supply chains are disrupted and labours have migrated. Many of them would start their return journey soon, but production schedules are haywire and social distancing is a norm that is very difficult to follow if normalcy returns. So, the dread is getting stronger and darker in the mind of the startup ecosystem.

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The Indian technology industry has been a role model for many due to its robust-hardworking workforce and youngish entrepreneurial mindset. Suddenly, the COVID-19 pandemic has become a stumbling block, where a lot of startups are getting hit.

The Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Angel Network conducted a survey called ‘Impact of COVID-19 on Indian Startups’. The results were startling. A whopping 78 per cent of startups will not have any cash reserves left to meet fixed cost expenditure in just a matter of 6 months.

Funding has reduced from all sides. Startups that have done a bit better in the past are surviving. But, they have different limitations. The ‘Go to Market Strategy’ has taken a back seat. Expansion mode has been changed to survival mode. The order books were full once upon a time, but now, the loss of forecasted sales is looming large.

So, does the situation looks grim all over?  Many startups have their cash registers ringing. Some have expanded human power as talented people are getting laid off from many brick and mortar spaces. Education technology, gaming, streaming services and delivery platforms of essential services not only survived, they actually managed to expand and hire too. Entirely digital models are doing well as their business model is not based on a physical form of delivery.

Sequoia Capital had issued a note titled “Coronavirus: The Black swan of 2020” to its portfolio company CEOs and founders.  The note asked them to be adaptable and flexible to survive the downturn. The note also asked them to review and self-justify each assumption they have for any business-related requirement such as cash flows, fundraisings, marketing, sales forecast and any capital based spending which are recurring in nature.

So what does an investor feel about this scenario? The founder-investor relationship has always been pretty much a masala Bollywood flick. It has those twists of love stories, coming together, falling apart, or happily ever after. But, how the relationship is going to evolve depends upon how well the business plan was laid out and whether the revenue model was robust or not.

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Kalpesh Patel, Founder and CEO of Solution Analysts, is looking for good startups to fund and do technological upliftment. “The ease of investing is higher now because founders are more flexible on exit rights, increasing number of seats in governing board and the preference of liquidation has changed as well,” says Patel.

Will there be a ray of hope, a silver lining behind these dark clouds? The road to recovery is long and far in sight yet. Startups are rising to the occasion. They are doing bridge rounds of funding to going back to small size equity investors.

Investors are now cautious shoppers. The focus is not only cash flow, but also on profitability and long-term sustenance. The proof of pull traction with customers, compelling business storylines and higher differentiation will be the deal-maker.  The exit strategy of founders too is facing the heat. Unless they bring sustenance with their own presence to sweeten the deal, negotiations of funding or takeovers are not going to start.

As they say, “The world is made of only two kinds. First are survivors and another are storytellers of survivors.” For next year, only time will tell which startup falls where.

(The author is a visiting faculty of IIMs and a master mentor with Centre’s Startup India Initiative)

 

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