Start-Up Funding Ecosystem Is Severely Challenged By The Covid Crisis

Team Startup CityThe Covid-19 pandemic has posed unprecedented challenges for the start-up ecosystem of India. Unemployment has risen, cash has dried up and then there is slowing down of funding. For start-ups, this has been the worst-hit element.Over the past few years, many start-ups received funding due to an increase in the number of funds, which were raised relatively easily with the lower cost of capital. However, considering the present situation, start-ups and venture firms are severely challenged.

Although the year started off well for start-ups and investors alike, the outbreak of COVID-19 soon dampened their spirits. With many sectors coming to a near halt, budding ventures began anticipating the worst – a severe liquidity crunch. On the funding side, start-ups are finding it difficult to raise capital as the money that venture capitalists invest in start-ups comes partially from public markets. And public markets are crashing and venture capital funds have become extremely cautious towards their spending for the time being.

The pullback in markets will have a knock-on effect on VCs funding. There will be a plethora of deals seen by VCs and they will demand better thresholds from start-ups. This means that the investors will wish to see more proof of traction with customers, a more compelling story, and a greater differentiation from the rest of the market.
As it turns out, start-ups that need urgent funding will face the challenge of survival. Others who have positive, profitable economics will capture market share. Amid this, start-ups with strong tech infrastructure are
likely to gain a strategic advantage over other traditional business models.

Data suggests that the value of investments in India have fallen from $1.73 billion in March 2019 to $0.33 billion in March 2020, indicating a fall of nearly 81.1 per cent.] There has also been a 50 per cent fall in the number of companies funded – from 136 firms in March 2019 to 69 firms in March 2020. Sources also suggest that between mid-February and March-end this year, investors have pulled back from closing current funding rounds. Thus, sourcing funds has become a major challenge for start-ups, resulting in cash flow problems for many. With the lock-down impacting daily business operations, start-ups have been forced into preparing contingency plans to limit workforce and cutting down employee salaries. Various start-up founders have also taken pay-cuts to limit losses.

While the entire start-up ecosystem is facing formidable challenges, there are few signs of relief. The Government of India has joined hands with various stakeholders to offer support to start-ups where they are trying to combat the pandemic using innovative solutions created by entrepreneurs, conducting webinars to offer strategic mentorship to start-ups, and helping incubators go virtual.

Also, recognising the financial and operational challenges being faced by start-ups, the Small Industries Development Bank of India (SIDBI), which also operates as the implementing agency for the Fund of Funds for start-ups has promulgated a ‘Covid-19 Start-up Assistance Scheme’ to provide assistance to certain eligible start-ups that have demonstrated the ability to implement innovative measures to ensure business continuity during the Covid-19 crisis, and ensured employee safety and financial stability.

Besides, a group of ten leading venture capitalists have issued a guide titled Best Practices for Founders in the wake of Covid-19 that provides advice on various aspects including fund-raising, company restructuring, business continuity, and redesigning business processes. The guide prescribes that the priorities of companies should be – “employee safety first, business continuity second, and liquidity and runway a key third.”

Industry reports suggest that few of the VC firms are shifting their focus from tech-centric start-ups to the ones operating in sectors such as FMCG, online grocery delivery, home entertainment, and others. This is definitely a silver lining. That being said, a few years from now we may see some new unicorns since start-ups will create unique business models for the changing environment. While the overall scenario looks grim right now, start-ups hope to overcome the crisis with joint endeavors from the government along with VCs and corporates.