The Indian start-up ecosystem is headed for a deep crisis due to the lockdown.
According to a Nasscom report based on inputs from 250 start-ups, 90 per cent of them are facing revenue declines, 70 per cent have a runway (days in hand before it runs out of cash) of less than three months and 30-40 per cent are in the process of shutting down temporarily or permanently. Nasscom’s definition of ‘start-up’ includes any technology product/platform venture incepted in the last five years.
“The situation is grim and the survival of the industry is at stake,” said Debjani Ghosh, President, Nasscom.
India continues to be the third largest tech start-up ecosystem in the world, with around 9,300 entities in the space providing direct employment to over 4 lakh people. In 2019, start-ups across sectors received funding of $20.44 billion, the highest since 2014.
Newer ones hit most
All that is about to be shattered. Nasscom, in its survey carried out over a month, said the most affected start-ups are those in the early and mid stages.
Already there are reports of scaled start-ups such as Swiggy and Oyo resorting to cost cutting in the form of layoffs and leave without pay, as their business are severely hit by the pandemic.
The Nasscom report said that the higher the revenue of a start-up, the greater its runway. Around 69 per cent of high-revenue start-ups have more than three months of runway for their businesses. In comparison, 74 per cent of those with low revenues have less than three months’ runway.
In many ways, the problems faced by start-ups are not entirely to be blamed on Covid-19. The bane, as with every bubble, lies in the fact that the business models were baffling (lack of profits and high cash burn), investors held the herd mentality to investing, and start-ups played the valuations game, looking for quick exits, said the report.
The situation that start-ups find themselves in is grave, as a lot of them require funding at regular intervals.
Their current sales are bound to dramatically reduce and raising money in these circumstances will be difficult and challenging, said Vivek Mansingh, General Partner, YourNest Venture Capital.
Changing biz models
Start-ups focussed on the consumer segment definitely need to reboot since business models and consumer preference are changing, according to Mohan Kumar, Partner, Avataar Venture Partners. On the other hand, B2B companies will also need to change but more for a course correction, he added.
Additionally, even as India has one of the largest and most vibrant start-up ecosystems, government regulations and compliance are proving to be challenging for mid- and smaller-sized start-ups, it is noted. “We are constrained by resources and, instead of working on our business, we have to constantly look at the regulatory aspect,” said a co-founder of a Bengaluru-based transportation start-up, referring to GST compliance, audit, etc.
To be fair, in 2019, the government announced incentives to boost the sector, including new incubators and relief from angel tax, said experts. But even this has not encouraged more entrepreneurs to venture into the start-up ecosystem in India.
According to data from Tracxn, a firm that tracks investments and financials of private companies and start-ups, the number of companies founded in 2019 was only 5,462 – a fall of 35 per cent from 2018.
One of the reasons is the little faith the government seems to repose in start-ups, especially when it comes to governance-related projects, said industry insiders. Apart from a few odd projects in Karnataka, Andhra Pradesh and Kerala, there are not many examples wherein start-ups are meaningfully collaborating with governments. Nasscom believes that integrated Central-State initiatives on procuring “Make in India” start-up product solutions could help them.