What the Covid-19 crisis means for Indian start-ups

The last decade of the 20th Century created the Silicon Valley, which has set up technology enterprises. That shift of technology in America created a substantial business transformation, moving from manufacturing to the services sector in India. During that time, the Indian economy had reported more than 7 per cent growth due to the information technology sector.

Similarly, in the last 6-7 years, India witnessed a market momentum in the direction of start-up businesses. These start-up ventures were successful in attracting young, intellectual human capital from eminent institutes. However, the seed capital is collected from angel investors and high net worth individuals. Further, the next round of capital was raised predominantly from the global venture capital firms. Also, the Central and State governments are extending their support to build an eco-friendly system for setting up start-ups, to achieve the dream of ‘Make in India’.

Guidance needed

Managing such start-up businesses is quite challenging under the current turbulent market conditions. Most of the start-ups are primarily set up by youngsters, and they need mentors and gurus to guide them at this taxing hour. The success story of services businesses in the beginning of 21st Century in India, was predominantly an extension of family-owned enterprises that emerged as global companies, like the Ambanis, Tatas, Birlas, and Hindujas etc. During that period, hand-holding was a significant factor in running family businesses. So there is a necessity for the same kind of hand-holding even now, apart from experience, age and financials, for the survival of start-up ventures in the present times.

We should remember that start-ups cannot be successful without carrying forward innovation, research and development. Statistics show that more than 80 per cent of start-up ventures are in the services sector, providing either e-services or m-services or both, using smartphones. Also, most young managers are finding it easy to set up businesses and earn quick money at a young age. This was not the objective of 20th Century companies. The 21st Century managers are encashing on the start-up boom, which could actually turn out be a bubble, due to the Covid-19 pandemic now.

Financing woes

Also, well-known Indian unicorn start-ups were able to avail financing from global players. For example, Tencent, Alibaba, Soft Bank, Ant Financials and DidiChuxing, which are the major Chinese and Japanese venture capital firms, invested in significant start-ups like OYO rooms, Ola, and Byju’s etc. On the other hand, a large number of Indian start-ups are still finding it difficult to procure funds. Indian venture capital firms like Sequoia Capital India, Blume Ventures, Accel Partners, etc have invested aggressively in some of such start-ups.

But now, due to Covid-19, many Chinese VC firms will be under severe pressure to raise finances. Also, investments from Japan, Korea and the US VC firms will hit Indian start-ups because of the present market crash and bear run in the capital markets. If the ongoing turmoil and uncertainty in global financial markets continues, it can terribly ruin the journey of start-ups.

As a consequence, many start-ups will focus on cost reduction and bring in cost efficiencies. As of now, the advertising and promotional expenses incurred by Paytm stand at ₹2,224.9 crore in FY18 and ₹3,451.4 crore in FY19, which show a 55 per cent rise in advertising expenditure in just one year. Similarly, PhonePe incurred ad expenses of ₹602.3 crore in FY18 and ₹1,296 crore in FY19, which is a rise of more than 100 per cent. Now the same start-ups will cut spending on advertisements and employee costs as well.

On the other end, valuation experts believe too much of uncertainty is not suitable for an economy. They also say valuing start-ups in such a situation would be very difficult and may even result in undervaluation of start-up ventures. This will lead to underperformance of VC firms.

This has been evident in the past; few reputed VC firms approached investment banking companies to protect their financials and also to mitigate their risks. Thus, the future of start-ups will be in the hands of VC firms, and to preserve their financials, there will be mergers and acquisitions on this front.

Finally, recession markets create challenges, as seen in 2008-2009; surprisingly, these were birth years of successful global start-ups like Uber, Flipkart, Airbnb and WhatsApp. Hence the trick is to believe in your innovations and update your business models to sustain this pandemic crisis.

The writer is Assistant Professor, Institute of Public Enterprise, Hyderabad

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