Coronavirus and funding challenges for growth-stage startups

While some sectors are worse hit than others, it would be wise for all startups to preserve cash and be ready to re-craft business models if necessary; the post-coronavirus world will witness the rise of new market segments

Updated: Apr 6, 2020 05:36:06 PM UTC
Image: Shutterstock

Governments are placing countries under complete lockdown. Travel has been suspended temporarily. Even food delivery and e-commerce services have been put on hold for the time being. The novel coronavirus (Covid-19) outbreak has wreaked havoc on the world’s economy. Several businesses have temporarily shut down. Supply chains and sales have been impacted to a large extent across sectors. For the country's startups, it poses yet another challenge, perhaps their biggest one to date: Securing funding in the strangulated financial ecosystem.

With the growth of the economy slowing, India, home to more than 50,000 start-ups, might take at least a few months to recover from the situation. Against this backdrop, start-ups, especially those in the growth stage, are at most risk of facing funding-related headwinds amid the pandemic-ridden investment landscape. Let’s take a look at some of the most prominent challenges.

The Chinese factor
According to NASDAQ, China is the world’s largest economy when compared to other countries in terms of purchasing power parity. Before the outbreak of the virus in China, which turned into a pandemic, the country had a GDP of $27.31 trillion. When it comes to the Indian start-up ecosystem, the inflow of funds and supplies from China has been a key source of strength for new-age ventures.

In fact, leading Chinese investors had called India their most important market at TiE Global Summit 2019. It was also the year when Chinese companies had invested $3.9 billion in Indian startups. However, although China is already on a path to recovery, it is unlikely that investors from China and other south-east Asian countries will be eager to pump funds in the pandemic-hit market landscape. This can translate into a tangible blow to the funding machinery for enabling budding and growth-stage start-ups in India.

Raising more capital
While most startups in their growth stage may have already completed their first- or seed-round of funding, they will find it difficult to move on to the next rounds of capital infusion in the present scenario. So how will they keep their business running, let alone expand and scale? This is another point of worry plaguing the country’s startup community. The lockdown, if prolonged, might lead to funding timelines to be pushed even further, leading to a cash crunch in most companies that were looking to raise funds. The past couple of months have seen sales dropping for many industries. Even if the deal has already been made with the investor, it might be delayed or put on hold indefinitely or until the lockdown lifts. Moreover, raising fresh funding will take a backseat for many a venture in the current scheme of things.

Sector-wise impact
While the pandemic has affected all businesses, some sectors have taken a greater hit as compared to others. Travel and hospitality, aviation and retail seem to have majorly borne the brunt of the situation. As of March 6, approximately 585 international flights were cancelled by private airlines. Even domestic travel, including buses and trains, has been halted. Restaurants and malls have been closed. With this, start-ups in the travel and hospitality sector would be finding it extremely difficult to even keep their businesses running, since there is no cash inflow from both customers as well as investors.

The way forward
While startups in most sectors have seen a slump in business, there are some for whom the pandemic has brought serendipitous opportunities. For instance, in sync with the surge in the demand for medical equipment and supplies, the healthcare and biotech sectors have seen re-energised activity over the last three months. With the country being placed under lockdown, sectors such as ed-tech, entertainment (OTT platforms such as Hotstar, Netflix and Amazon Prime) have also experienced a significant expansion of their consumer base.

Although governments across the world are endeavouring to contain the spread of the virus, it will take a few months at least before the global situation regains its erstwhile equilibrium. On the other hand, the global market is also expected to undergo major paradigm shifts once the pandemic blows over.

All startups would be wise to do two fundamental things. First, in the absence of certainty on revenues, they must preserve cash at all costs so that they can survive this phase and be ready to get going as soon as the curtain lifts. Secondly, they must be ready to go back to the drawing board to recraft their business models and maybe even the sectors they are in. One start up, for instance, has shifted gears in a matter of weeks and is getting ready to manufacture ventilators for hospitals to deal with Covid-19.

The transformations will be driven by a new awareness of the criticality of sectors such as healthcare and logistics that are currently sustaining our society under quarantine. Hence, the post-coronavirus world will witness the rise of new market segments and newer opportunities that innovators can seize to not only make the world whole again but also drive it towards a healthier future.

The writer is chairman of the Indian Angel Network

The thoughts and opinions shared here are of the author.

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