MAY 31 2020

How has COVID-19 affected the indian startup ecosystem?

The corona virus outbreak has dramatically changed our lives and affected the social, environmental and economic sectors in India. According to an MRD report, economists have said that there is a job loss of 40 million people in the country and as of today we have seen a contraction of 4.5%, a historical low. , How has this affected the startup ecosystem? A startup ecosystem is formed by startups in different stages and various types of organisations in a location (city, town etc), interacting as a system. To broadly classify it: every stakeholder in a startup would be part of its ecosystem. As mentioned by the Department for Promotion of Industry and Internal Trade, India had over 50,000 startups in 2018 with 2-3 startups being born each day! The startup ecosystem in India has scaled to become the third in the world after USA and China. 2019 was a breakthrough year for India as startup funding was at an all time high, raising about 14.5 billion USD. Although the Indian startup industry was booming, it came to a sudden halt due to the novel coronavirus outbreak. Results from a Nasscom survey showed that 70 percent of startups have less than 3 months of cash runway. 22% of startup companies have 3-6 months of runway, while only 8% have a runway for 9 plus months. COVID has mainly affected startup revenues and funding. Since Consumer demand came to a standstill during the first lockdown, businesses had to either shut down or redesign their business models if they wanted to survive. Out of the 250 startups surveyed, 40% of them halted operations or closed business. Furthermore, the data revealed that 92% of the startups were facing a revenue decline. Out of which 62% faced a decline of over 40% in revenue. Startup funding has also plummeted. Funding in march (the month when the lockdown was announced) showed a 50% decrease in funding from february according to Venture Intelligence. Many prevalent venture capitalist firms such as Sequoia Capital, Accel, and Lightspeed warned of a difficult funding environment due to the uncertain circumstances. One argument is that this decrease is partly due to India’s new Foreign Direct Investment (FDI) policy. This states that, “Any investor of a nation that shares land borders with India will now require government approval for making any investment in India”. However, this was only an additional obstacle to startup funding compared to the massive dent created by the pandemic. These statistics were the average effects of a random sample of startups in India. Different types of startups were affected differently. For example: Travel and Transportation startups faced the largest decline in terms of revenue as they faced the largest decline in consumption. Business to Consumer (B2C), startups were also affected severely as most relatively new B2C startups reached near-zero levels of revenue. On the other hand the edtech sector was greeted with a set of bright opportunities as they saw a 14% increase in revenue. Moreover, Business to Business (B2B) companies saw mild revenue declines and faced less drastic repercussions than expected.

When it comes to funding, agritech and fintech startups were hit the worst, but it’s not all bad as the healthtech sector came out with better funding. While startups are looking for loans from banks and non-banking financial institutions, and capital infusions from investors; most startups are seeking immediate government support for aid. Whether it be supportive policies, easing regulations, partnership opportunities, or reimbursements on immediate fixed costs. Two thirds of startups questioned believe that the pandemic will last for at least a year. What will happen to startups at this rate with plummeting revenues and lack of funding? Well it’s not that grim as the market is adapting to this situation. While traditional techcentric startups are fading, venture capitalists and consumers have shifted focus to startups operating in sectors such as: Fast Moving Consumer Goods (FMCG), online delivery, home entertainment etc. Furthermore, Edtech, fintech and cybersecurity are experiencing a great increase in consumer demand, which is reeling in investors. The government has also issued $130,000 to startups in order to create an encrypted video conferencing solution. Although the pandemic has negatively affected the startup ecosystem in India, it has also unlocked a whole new genre of potential startups. Some companies are already showing growth patterns once again through innovative ideas to overcome the pandemic situation. Soon, we can definitely expect a positive comeback in startups emerging and growing in India.


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By Karthik Sridhar