“Startups don’t generally die for a lack of ideas. They die because they run out of cash.”
As rightly emphasized by Arihant Patni, Managing Director, Ideaspring Capital, Covid-19 has caused cash crunch for many startups and toppled their business plans. Startups often operate with smaller teams and fewer resources and have lower cash buffer than a large/established enterprise.
A mid-2020 NASSCOM study reveals that 90% startups witnessed a decline in their revenues.
Covid-19 Impact on Startups – A Mixed Bag
The challenges faced by startups are different across sectors.
The most affected were travel, hospitality and retail, last mile services, food delivery, and other non-essential services. However, technology-based services such as fintech and online education, essential services, digital payments and e-commerce and healthcare (including telemedicine) witnessed a boom.
How Are Startups Responding?
Payment delays was a main cause for cash flow constraints in the B2B segment. About 60% of startups in this space are disrupted, another 68% are keeping a close watch on their spends and cutting down their operational and administrative expenses.
With the effect of the pandemic likely to impact startup cashflow for another 12 months at least, most startups are seeking policies that support easing of regulations and opening up of government procurement.
Others are looking for partnership engagements and options to refund immediate fixed costs.
Agility is the Second Name of Survival
Though the direct impact of the lockdown was severe on Indian startup ecosystems, business owners have implemented quick decisions to reimagine their businesses.
In a more impactful effort, many startups reduced their cash burn and enhanced finances quickly by adopting the following measures:
- re-evaluating expenses
- reducing office size/vacating space
- providing work-from-home options to employees
- announcing pay cuts
- approving unpaid holidays and layoffs, amongst others
Startups also started pivoting new revenue sources/business models as the main revenue stream may have been blocked or impacted.
A few startups reached out to their existing investors for access to working capital, besides raising bridge funding to keep their businesses running.
With reduction in available funds suspending manufacturing and business development activities, ultimately resulting in loss of projected orders, NASCCOM’s survey recommends that startups receive some funding support from the government to alleviate the economic crisis.
The following relaxations were introduced by the Indian regulatory bodies to ease the financial burden of startups and facilitate their day-to-day operations:
- The Indian government instituted INR 1 crore financing facility under the infrastructure fund in August 2020 in a measure to support startups in the agriculture and allied sectors.
- The Small Industries Development Bank of India (SIDBI) announced the Covid-19 Start-up Assistance Scheme for enabling loans towards working capital.
- The Reserve Bank of India (RBI) introduced a Covid-19 regulatory package to reduce the liability of debt-servicing, fulfil working-capital requirements, and permit lending bodies to grant a deferment of payments on outstanding loans as of March 1, 2020 for a period of six months (extended from 3 months).
The New Startup Normal
The pandemic has not ended the growth of all startups affected by Covid-19 but has certainly amplified their efforts to identify and understand the need for improvement in them. It has demonstrated the need for custom regulations, home-grown products and digitization/modernization.
Even for the startups leveraging existing resources for alleviating the cash crunch, their growth and innovation potential are at risk. Hence, policy measures should not only provide aid to startups by relieving the burden of cash flow restraints, but also involve sustainability plans to ensure long-term progress for the startup business ecosystem.
In summary, for the startups that live through the pandemic, the post-Covid-19 world spells exciting new opportunities.