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The survival strategy for startups

ON BALANCE: As Covid-19 takes its toll, the startups ecosystem will have to brace for a strange new world of opportunities and dead ends
Startups are more agile and used to taking mid-course corrections, and even pivot their business models multiple times. Take the case of ecommerce player Snapdeal which has pivoted multiple times, undertaken course corrections, and lived to tell the tale

  |     |   Published 12.06.20, 02:31 PM

The toll the Covid-19 pandemic has taken on the economy is still something experts and economists are unable to fully quantify. As the prolonged lockdown makes way for Unlock 1.0, it is becoming clear that several sectors will continue to struggle as the economy attempts to slowly crawl back to some semblance of normalcy.

The much-celebrated Indian startups ecosystem has been hit particularly badly by the pandemic, and has seen ventures struggling to cope, survive and stay alive as business across sectors vanishes overnight thanks to the twin effects of the pandemic and the consequent lockdown. In a recent interview to a leading financial daily, Rajan Anandan, former Google India boss and current managing director at venture capital firm Sequoia India said thousands of Indian startups will likely face an existential crisis as the pandemic cripples the economy.

Till recently the toast of the Indian economy and an integral part of the India Story, how will startups cope with what is going to be a very strange, challenging new order? How many will survive? And how many will fall by the wayside? Is there any silver lining at all? These are the issues startup founders, and those in the private equity and venture capital business, are currently grappling with, and there are no clear answers.

Startups, like every other sector, have been caught completely unprepared. Not because of bad planning; a global pandemic is hardly a routine event, so planning for it was clearly out of the question. However, startups are used to regular challenges in their business cycle. They are more agile and used to taking mid-course corrections, and even pivot their business models multiple times. Take the case of ecommerce player Snapdeal which has pivoted multiple times, undertaken course corrections, and lived to tell the tale. Startups are often more nimble and flexible than established companies, and adjusting to rapidly changing market situations are part of a startup’s DNA. On the negative side, startups are usually more vulnerable than more established firms, and are high risk. They are usually loss-making, and resort to rounds of funding to sustain the business. They burn cash, they raise money, and they have a limited runway. No matter how accustomed they are to challenging situations, the big difference this time is that revenues in most cases are down to zero, or near zero, depending on the sector a startup is in. That, for them, is unprecedented. Having revenues, sustaining losses, and burning cash is one thing. Zero revenues is altogether another story.

Krishnan Ganesh, serial entrepreneur and promoter of well-known startups like Portea Medical, bigbasket and Freshmenu, among many others, calls it a “triple whammy” for many startups, where over and above losses, revenues have vanished overnight, and then there are those which operate in sectors which are particularly affected by Covid-19, like travel and tourism, hospitality, food and beverages, and the like. “This triple whammy is the biggest problem,” Ganesh tells me.

Facing the storm

Startups are generally used to challenges every few years where businesses take a hit, valuations go down from the earlier dizzying heights, and there is a phase of layoffs, cost-cutting and other austerity measures to stay afloat. Some even pivot into other businesses. OYO, the hotels aggregator, for instance, had pivoted well before the pandemic hit as did several others as basic strategy for survival and growth. “But the nature, size, scale and impact of the pandemic is 10x exponential,” Ganesh explains. “What’s happening now is of a different horror and scale.”

Ganesh is right. There is hardly any country which has not been affected by the pandemic, and every sector is reeling under its impact. Only a small sliver of sectors, among them e-groceries, ecommerce, healthcare, and gaming, are able to withstand the impact and, in some cases, seeing business opportunities as the use of online options takes a quantum jump. Pivoting, then, isn’t the solution. A full rebuild will be required for those sectors in the path of the Covid-19 storm. Startups associated with sectors like travel, restaurants, hotels, entertainment, sports and the like will take severe hits and need to have the staying power to sustain the impact. For some others, like healthcare, online education, remote working and others could be a DeMo moment – like demonetisation, the pandemic can present an opportunity to move up several notches in the growth cycle.

Ganesh, whose Portea Medical is a leading in-home medical care provider, says Portea is also making additions to its offerings with stay-at-home nursing, increasing the duration of nurses staying with patients (with Covid testing protocols in place), and even services like home chemotherapy. Teleconsults have also gone through the roof, with patients unable to visit doctors. Ganesh believes not just healthcare, as the effects of the pandemic begin becoming clearer, even the older generation, more vulnerable to infection, will take to online options for many other activities, including gaming, providing opportunities for startups in such sectors.

Essentially, startups have to see the pandemic and its impact in three clear phases, entrepreneurs and venture capital players tell me. First is the lockdown and gradual easing phase, where it’s like a war, and the best option, in case startups have the staying power, is to stay put and watch how things play out. Just like during a war, staying alive becomes critical; trying to predict or model the future business is a waste of time, and all measures will be taken by them to keep costs low by way of pay cuts and other tough measures so that they can extend their runway and stay alive. If they see opportunities in allied activities which are witnessing growth, they may get into those to stay afloat. So you have the restaurant aggregators getting into grocery delivery, apparel makers making masks, and so on.

The second phase will be one of a phased recovery where, depending on which sector or geography the startup is in, activity will gradually begin to return, ever so slowly. So while malls and multiplexes may remain shut for a while, salons and standalone retail stores may open, depending on which geography you belong to. If a restaurant is located in a business locality, home delivery options may be limited. Not so if it is situated in a residential area. A restaurant in Mumbai’s Nariman Point may not find home delivery a viable option, while one in Bandra may have customers for it.

The third phase will be the new normal. Even here, some startups in the pandemic-hit sectors like cruise liners, high-end restaurants and others may find the going very tough. On the other hand some ticketing platforms or hotel aggregators may find a viable option in near-shore destinations rather than longer distance domestic travel or international travel. Customers may prefer a weekend drive from Mumbai to nearby Lonavala rather than a long distance holiday, and startups offering ticketing or hotel options will need to add such options to their services.

Funding and consolidation

Serial entrepreneurs and venture capitalists say that in the current war phase everyone is in wait-and-watch mode. “No one wants to catch a falling knife,” Ganesh explains. But funding options are available, and private equity firms and venture capitalists are waiting for the dust to settle a little before deciding on their next course of action. PE/VC will remain an attractive asset class, and allocations to these sectors won’t take a hit even in these times, because the risk-return equation here remains undisturbed, and few other asset classes will give better returns. But PE and VC firms will wait for longer and they will expect valuations to fall further so that they can participate in subsequent funding rounds from an even better position in terms of valuations. But the good news is that PE/VC funding isn’t going away.

Startups which are unable to hold on longer will want to consolidate, and those which find value in acquiring or getting acquired will go for such consolidation. If a startup finds that the economy of scale being expected from a venture is likely to take 36 months instead of the earlier planned 12 months, an acquisition to get to that 12-month target may make more sense. Funding rounds are, however, bound to take longer. A round which would typically take a month can now extend to six months.

But despite all the survival strategies which startups may adopt, there’s also the grim reality that the pandemic will take a heavy toll. The particularly vulnerable ones, right in the eye of the storm, will take a severe hit and die. And there will be many who will fall by the wayside. The war is still on, and no one’s counting the bodies just yet. But once the worst is over, the startup body count will begin to be visible. And it won’t be a pretty sight.

The only silver lining: those that have survived this horror will emerge stronger, with fewer players in every sector. Tempered by fire, the post-pandemic startup will likely be a stronger entity. Because it can’t get any worse than this.

The writer is Editor, Fortune India

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