How the Indian start up sector can survive the pandemic disruptions

In the face of the Covid-19, the government, academia, industry, investors, and the start-ups will need to work together to create new products to battle the pandemic driven recession and build a new world.

Up until the onset of the viral outbreak in India two months ago, the country's start-up ecosystem was described as “thriving”, “booming”, “flourishing” and “progressive”. Over the past two decades, the Indian entrepreneurship evolved from being in its nascent stage to becoming the third largest in the world. The Indian start-up ecosystem was growing at 70 per cent year-on-year. The country had more than 30 unicorns, and it was predicted that the country was well on its way to creating ~125 unicorns by 2025. In 2019, start-ups had generated an estimated 60,000 direct jobs. The engine of job creation was running full steam ahead. And then, at the start of 2020, the pandemic hit the world.

The pandemic perplexity

The Covid-19 crisis delivered world economies a punch in the gut. IMF declared a global recession. Against this backdrop, businesses came to a grinding halt. They either wound down or had to quickly pivot in order to just survive. Raising funds became hard with liquidity drying up, public markets were falling, every asset class was illiquid and nothing, but cash ruled the day. Start-up founders were, in the initial days, completely confused. They had no idea what hit them. Hundreds of mentoring sessions were held across the country, guiding these founders to just focus on the basics: retain the cash, bring in the cash and postpone any outflow of cash. Cash is King resounded in every conversation.

But Covid- 19, as it has turned out, is not a short-term pandemic. Now founders of young start-ups are facing one of the most difficult situations that any founder can face - pay cuts and job cuts. Many founders went through some very difficult decision-making times - deferments were easier, pay cuts more difficult but job losses were the most painful. It meant employees would be without any income in perhaps the toughest economic situation over the last hundred years. Empathy and sympathy went hand in hand but ultimately, founders had to make the hard decision of being cruel to be kind. It was important for the businesses to stay afloat so that at least some jobs could survive rather than all jobs be lost. Start-up founders had to draw strength from each other as well as larger companies. Many large multibillion-dollar companies reduced salaries and asked employees to go on leave without pay. According to a recent report, more than 20 per cent of Indian companies that were surveyed had to lay-off staff post lockdown. Certain sectors like hospitality, transportation, automotive, travel, non-essential retail were hit worse than others, mirroring global trends. With the nationwide lockdown in India, around 27 million Indians between the ages of 20-30 years lost their jobs in just one month (April). In states like Bihar, unemployment has gone up more than three times from ~15 per cent to over 46 per cent, just in a period of two months. This has already started to create a socio-economic problem in the country which will get compounded by law and order issues.

The government intervention

A start-up survey indicates that 37 per cent of start-ups have only enough to survive the next 12 months while 10 per cent for less than three months. The wind downs are going to be abound, impacting the value created till date. It is, therefore, imperative that the start-ups survive. Particularly, as they are the ones who are building innovation, and creating both jobs and value. There have been several measures enabled for start-ups to survive - both by the government as well as by private stakeholders. The Indian Finance Minister has announced a slew of measures to revive the economy and special packages for the SMEs which will also be relevant for start-ups. These include expanding the playing field for start-ups across sectors such as power distribution, social infrastructure, space exploration, atomic energy amongst others. The policy changes aimed at easing GST payment schedules, Direct Benefit Transfer, accelerate tax refunds, ease of doing business, easing government procurement, enabling working capital loans will also go a long way to support the Indian start-up sector. Additionally, the government, through its Fund of Funds, has accelerated the deployment of funds to VCs, so that these can be deployed to start-ups as well.

India is a large country with myriad needs. While the government has taken several decisive steps, there is always more that can be done. The start-up industry has made several suggestions: underwriting 50 per cent of all salary bills and contract wages for six months (April to September 2020), claim higher amounts of GST refunds, waiver / underwriting of rents and utility bills, reduction amongst others. Other suggestions include enabling more funding for start-ups, subvention of interest to banks for providing loans to start-ups, creating a debt fund for start-ups, ease the winding down process so that failing businesses are wrapped up and founders can move ahead in life. Many of these suggestions have taken a cue from what countries like the UK, US, Canada, and Germany have announced for their start-ups.

A VC recalibration