Emerging Entrepreneurs

How should start-ups play the game in a post-Covid world?

Thillai Rajan A. | Updated on June 08, 2020 Published on June 08, 2020

Ability to pivot, temper expectations on fund raising and focus on the burn rate are key to sustain a business in times of crisis

When Prime Minister Narendra Modi gave a clarion call of Startup India, Stand up India from the ramparts of Red Fort during his Independence Day address in 2015, the nation rejoiced. I may have gone a little overboard in saying so, but let it be. Since then, there have been rapid strides. At least 14 different ministries and departments in the government have a policy to promote and encourage start-ups.

Following the footsteps of the Centre, most State governments have implemented policies to promote start-ups. The Union Budget every year had something to cheer start-ups. Even in the most recent budget presented on February 1, 2020, the government had recognised that ‘Start-ups have emerged as engines of growth for our economy’, and proposed early-stage funding, by setting up a seed fund to support ideation and development of early-stage start-ups.

The impact of the favourable policy regime can be clearly seen. Startup India, set up under the Ministry of Commerce and Industry, has more than 79,000 start-ups registered in its portal, which indicates an average of more than 1,300 start-ups per month. Number of angel deals, deal investment amounts, and the number of angel investors have all clocked triple digit growth rates in recent years. At the ground level, the impact of start-ups on day-to-day activities has been tremendous. New business sectors that seem so indispensable today such as e-wallets, taxi aggregators, hotel aggregators, e-commerce and marketplace and food delivery have been completely built ground-up by start-ups. Therefore, when the Prime Minister announced the ₹20-lakh-crore stimulus for 2020, one would have expected something for start-ups as well. But alas, almost overnight start-ups seem to have become an orphan. Not even once did the word start-up find a mention during the five tranches of stimulus measures announced by the Finance Minister.

The writing on the wall is clear. One might argue that MSMEs are one of the central pillars of the stimulus programme. Technically, all start-ups should be a subset of MSMEs. However, in practice as well as outlook, they are as different as chalk-powder and sugar. Even in the government scheme of things, MSME is a separate ministry, whereas start-ups are dealt with by the Ministry of Commerce. It would have been too much to ask of the government to use this opportunity and clean up the Augean Stables, so to speak, but by playing it safe, they have thrown out the baby along with the bathwater.

To be heard is critical

There is an urgent need to create an exclusive industry body for start-ups that can go to the battle. Big industries can make their voices heard through CII, Assocham, FICCI, and several such bodies of commerce. Nasscom played an important role in the growth of IT and IT services industry.

SMEs have their own organisations to protect their interests. Farmers have their own associations as do movie makers. While some of the existing industry bodies have created start-up desks, the time has come to create an exclusive industry body with the necessary stature and nous to articulate and represent the industry to the policy makers.

New rules of the game

Given the situation that there is, how should start-ups play the game now? Three things come to mind. First, is the ability to pivot. Start-ups can morph overnight without significant disruption to their operations, which larger or asset rich companies cannot. As much as old opportunities have shut, new doors have also opened post-Covid. Start-up founders should actively scan the landscape and seize any transformational opportunities that appear on the horizon. A bottom of the pyramid entrepreneur that I knew, quickly changed from being a garment maker to a mask manufacturer.

Second is to temper the expectations on fund raising. Though the funding scenario would emerge only when the dust settles down, we can expect it to be very different from what it was in the beginning of 2020. Small ticket sizes in start-ups that do not have an existing overhang would be preferred. To that extent, I expect angel investments would be less impacted as compared to seed stage funds. Among the angel investors, first time investors are more likely to make an investment as compared with those who have a strong track record of making investments. Active angel investors, influenced by the performance of their current investments, would most probably be spending time to monitor their existing portfolio, rather than new proposals. Furthermore, under the circumstances, angels are more likely to invest in founders with whom they share a common connection.

Third is the relentless focus on the burn rate. Unlike MSMEs, where revenues are quick to come by, start-ups need time to develop products. Initial operating expenses must therefore be met from funding received. With the prospects of additional funding becoming more difficult, utmost efforts must be made to increase the runway with the current amount of funding. There is no need to be embarrassed to let people know that you are counting the pennies. A COO of a mid-size company employing about 1,000 had no qualms in recently admitting that they are even identifying opportunities to save trifling amounts like a few thousands.

Summary

Thinking philosophically can be a great solace in moments of crisis. While we should be aware of the dangers in a crisis, we should also recognise the opportunity. And that would be the single biggest differentiator between the ordinary and the extraordinary.

(The author is a Professor at IIT Madras, an Associate at Harvard Kennedy School, Harvard University and co-founder of YNOS.in)

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Published on June 08, 2020
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