Impact of COVID19 on Startups Business

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THE WORLD IS GOING TO END IN 2020. Over the years, we have noticed the hype and anticipation created in the media and by people around us over how the year 2020 is going to impact the world. Around 13 MILLION, yes, that is the count of people around the globe who have been affected because of the outbreak of Coronavirus from the city of Wuhan. No one ever imagined that we would witness declining economies, hampered society, and deterioration of the environment because of a global health emergency.

Testing times for Indian Startups

Covid-19 pandemic has posed unforeseen challenges for people across economies. The start-up economy in India, post witnessing rapid growth in previous periods, is now trying its best to take a breath in this downfall. Start-ups are seeing vulnerability from business, as well as, from an operations perspective. With their survival at stake, the statistics show that around 40% of the startups have shut down their operations or are on the verge of shutting them down, either permanently or on a temporary basis due to consumers staying quarantined at home, resulting in the fall in demand and/or supply amidst the global pandemic. The exception here are the start-ups involved in the business of ‘essential services’, educational technology, gaming/streaming services, fintech, media, and entertainment. These start-ups are in fact experiencing an exponential rise in their demand and/or supply.

High Impact on B2C Startups

The worst-hit are the start-ups operating in the B2C market. Around 60% of the B2C startups face closure, as a result of consumer hysteria, and the revenues reached almost zero levels, due to the call by the Indian government for a nationwide lockdown. Comparatively, the start-ups operating in the B2B market have faced less severe consequences.

Impact on Revenue and costs

COVID-19 is proving to be a roadblock for all start-ups, as their future business growth now seems to standstill. Change in the macroeconomic factors post the outbreak of the virus is impacting the business activities in various industries, hence they will take a long time to recover to their pre-pandemic levels. As per the statistics available, 92% of startups face revenue declined by around more than 40%, out of which 34% of start-ups revenue steep by over an alarming 80%.

While many start-ups are closing their businesses as revenues have been hit hard, the others are trying to alter their business models to sustain this crisis. Another added burden on the shoulders of the startups is the constant need to deal with the rapid changes in technology upgradation. It requires directing resources including money, employee focus, etc, which as of now are assigned to the primary goal of surviving the business in the economic changes, hence, facing the opportunity cost of not being able to boost the technology adoption.

The decline in Startup funding

Along with revenues being impacted, COVID-19 has influenced the start-up funding also, as there is a rise in the uncertainty amongst the investors. The early-stage start-ups are dealing with an economy where there is a funding crunch. Between the mid of February 2020 to March 2020, investors have also pulled back from closing current funding rounds. Around 65% of the startups have seen a negative impact on their funding, leading to a lack of working capital for their survival and creating cash flow issues impacting their long-term sustainability in the economy. Another reason for the decreased investments is the holdback of the Chinese capital inflow in the Indian economy which is one of the main factors for economic slowdown leading to fall in venture capital deals.

After facing the pandemic effects, now startups are expected to deal with heavy negotiations on valuation while working with new investors, as they may put forward discounts and stipulate bargains in value. The startups valued on the ARR basis are seeing the mean multiples decline by around 30%-40%. Along with the valuation being lower, the capital being raised is way smaller than what the new startups had planned. As a repercussion, possible delays in deal execution or closing may be faced by startups, while some startups will be ready to accept the deals offering fundings at reduced valuation. In this economic situation, where money crunch is faced by many businesses, the founders of startups are leaning towards accepting terms favoring the investors by being flexible on the other parameters such as board seats, exit rights, liquidation preferences, and investor’s say/veto.

Lesser Jobs and more layoffs in Startups

Start-ups are known for fueling the economy by generating employment opportunities. As the disruption in the supply chain has resulted in adversity, businesses are struggling to deal with their day-to-day expenses. As an adoption of the cost reduction method, 31% of Indian startups chose layoffs as a means in this crisis to limit their workforce. While others stuck to cutting down the employees’ salaries and founders taking pay-cut to limit the losses faced.

About 70% of startups have less than three months of cash available. Conserving the available cash has become a priority for the founders to combat the crisis. From preparing contingency plans to lay-offs, pay cuts, reevaluating expenses a number of measures are being taken to sustain the cash available for a longer duration.

What you should do?

Post world war 2, this global pandemic is the greatest challenge that humankind is facing. In the need of hour, key support from the government is needed in favor of startups in the form of funding, easing compliances and policies, etc. The key to sustaining in the ecosystem of start-ups in the wake of COVID-19 is striving to adapt to this changed scenario, being flexible and innovative, and diversifying your techniques and operation, eventually leading your way to create a unique business model.

About the author

Ashutosh works as a Product Manager at Refrens.com – India’s most powerful platform for freelancer’s finances and growth. He has helped some renowned technology companies with their product. Here he shares his thoughts on the impact of COVID19 on Startupts.

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