Innovation at knifepoint: Startups' bid to survive Covid-19

In Bengaluru most organisations got through the lockdown by reducing marketing spends, introducing pay-cuts and right-sizing

A health-tech startup that worked to provide a portable ventilator for health professionals; a tech-driven construction outfit that switched to delivering essential items to its customers and even developed mobile testing vans; a ‘sleep solutions’ startup that launched work from home furniture in the initial months of the lockdown — the response of the country’s startups to Covid-19 was quick and effective.

Most startups have been forced to innovate and reimagine their businesses, while taking measures like a shift in the working mode, reducing cash burn and right sizing in order to survive.

As a result, a majority of the segments have entered the recovery phase, after overcoming a crisis that threatened to engulf them a couple of months ago.

Startups in segments like EdTech, digital health and e-commerce are thriving, with more than 200% growth in terms of business recovery; others like digital payments and OTT services have strong tailwinds, while those in the travel and hospitality sectors are likely to take more than a year to recover.

Read | Lockdown: Enterprises diversify to tide over the crisis

A survey conducted by industry body NASSCOM in May had indicated that more than two-thirds of startups in India needed to secure additional capital in the coming weeks; over 70% of startups were said to have less than three months of cash runway.

The TiE Delhi-NCR report on the Indian startup ecosystem in October shows how the trend changed post-June. Tech startups continue to receive strong investor interest and raised 1.4 times more funds than during the same time last year.

In Bengaluru, one of the largest startup ecosystems in the world, most organisations got through the lockdown by reducing marketing spends, introducing pay-cuts and right-sizing. Experts suggest around 15-20% of startups in Bengaluru might still be in a critical position, but others have reworked their business models and modified their products and services, in a bid to survive until funding opportunities returned.

Pivoting businesses

For instance, Bengaluru-based Woovly was an adventure-experience-platform where one could create a bucket list and be a part of a community with shared interests. However, when the series of lockdowns left the travel industry decimated, Woovly pivoted to become a Social Commerce platform for Lifestyle products. They raised $2.5 million in the pre-series A round from SOSV - VC fund, based on their revamped business model.

Even though the sentiment in the market is positive, it is largely limited to sectors with huge tailwinds. Early-stage startups with ‘exciting’ ideas and those in the sectors that are doing well have been able to raise money.

Overall, online education startups raised over $1.5 billion since the onset of pandemic. Three Bengaluru-based EdTech platforms Unacademy, Vedantu and Embibe raised about $335 million, while Byjus has raised $1.1 billion since January this year. Investors have also remained bullish on sectors like e-commerce, gaming and health-tech.

While auto industry continues to show a downtrend, startups in the electric vehicle (EV) space have not let the pandemic dampen their spirits. Bengaluru-based Ather Energy is one such EV startup that has raised Rs 84 crore funding in July, from Hero MotoCorp.

Bengaluru leads in the startup race when it comes to the number of funding deals — with Bengaluru-based companies having raised $2,436 million in the first half of 2020.

Experts, however, mention that there is a significant drop in the number of startups approaching investors.

K Ganesh, a serial entrepreneur, says “Startups also understand that investors are not able to do due diligence in the current scenario. Both investors and startups don’t know what’s the impact, how long the recovery process will be, what’s the new normal. So they can’t value the business.”

Many startups have been forced to innovate to adjust to the new reality, where people are cautious about money, says Mohandas Pai, former Infosys director and venture capitalist. “They are not going to just pour money for you to blow it up. They want better management, better use of capital.”

As Ganesh puts it, “nobody wants to catch a falling knife” and startups are taking time to remodel their business and then look for investments.

With the rising tension between China and India, most startups will also need to start looking for funding in newer geographies. China has accounted for more than $5 billion investment in Indian startups till date, with stakes in leading tech firms like Paytm, Zomato, Flipkart, Big Basket, Udaan and others.

Guhesh Ramanathan, entrepreneur, mentor and founder of capital advisory firm Excubator, says most of the Chinese investments have been happening in high-growth startups, so it’s the large players that have been hit but considering their size and scale, finding alternate sources of funding is not a problem.

“On the smaller startups, there was very limited money from Chinese Limited Partners (LPs) that was coming into Indian funds. Indian venture capitalists, however, have also gone slow in terms of finding new investments, because they are preferring to shore up that capital for later stages for their own portfolio.”

Changed business scenario

Covid-19 has also accelerated the transition to the digital economy, with those organisations without a digital presence preparing for a digital makeover.

The crisis has also led to a consolidation of existing businesses, with an uptick in mergers and acquisitions. Roma Priya, Founder of Burgeon Law, a firm that helps the Indian startup ecosystem says, ”We have had many clients close down between March and now because of lack of capital. A lot of our clients, however, have gone through acquisition, collaboration to move forward. Startups that are not getting investor interest are looking for a big player in the same market.”

Many startups have raised money on their pivotal model. According to a TIE Delhi-NCR report on the Indian startup ecosystem, around 30% of startups have pivoted to newer markets for alternative revenue streams, while more than 55% of startups are focusing on profitability and reducing cash burn.

Sanjay Swamy, Managing Partner, Prime Venture Partners, says, “The reality is that money has gotten dearer and the bar for fundraising has been raised… funding for companies that are seen as essential by a large customer base will always be available but those that are not, will struggle.”

The way forward

According to data by the Department for the Promotion of Industry and Internal Trade, 4.22 lakh jobs were created startups in the country as of September this year; Karnataka stood second in job creation after Maharashtra, with 71,533 people directly employed.

Ganesh says that the State government should come to the aid of startups because the government’s biggest challenge is unemployment and startups create employment.

Most entrepreneurs who are in their late 20s and early 30s, have an appetite for risk. So although the Covid-19 crisis triggered survival anxiety in every second organisation, most of them have managed to think on their feet and chart a new path ahead.