Startups under tremendous pressure post Covid-19

The startup revolution brought a new wave of entrepreneurs – young and hungry to scale success with innovations. The startup economy grew fast and furious, creating phenomenal value of about $3 trillion. Despite the smooth sailing, startups were struggling with challenges like low inclusion (only 14.1% founders are female) and value creation concentration (74% value produced) in 10 cities globally. Tech giants like Softbank and WeWork were also showing signs of faltering.

However, there were no catastrophic challenges in the horizon when Covid-19 changed the scenario almost overnight. Soon after the crisis struck:

• Startup layoffs increased – on an average 33% of the staff was let off globally, while just over one-third of the global startups avoided cutting jobs or hours.
• Startups faced the dual curse of falling consumer demand and disappearance of potential investors leading to drop in revenue and capital crunch.

The startup economy is undergoing a major transition as the impacts of Covid-19 are becoming more visible. Startup Genome findings suggest that Startups are facing a mass extinction scenario as the pandemic shocks linger on.

Travel and tourism experienced the worst decline with 70% loss, followed closely by the automotive sector with 43% loss. Comparatively the tech startups were less effected, but the financial impact was quite substantial. Social media and messaging startups witnessed 22% degrowth, Gaming contracted by 19%, while Crypto fell by 14%. Two shockwaves that resulted in the losses are:

Shockwave #1: Capital

Owing to Covid led uncertainties, funding by venture capitalists fell by 20% globally in the first quarter of 2020, while China reported a 50% plunge. Startup Genome projects 40% of the startups have less than three months of capital runway. It implies that if these companies are unable to raise additional capital considering their revenue and expenses remain unchanged, they would be on the verge of collapse.

Shockwave #2: Demand

Experiencing a devastating plunge in demand about 72% startups witnessed a revenue drop with an average decline of 32%, while only 12% experienced growth.

Indian Startup and SME Scenario

The global scenario resonates with the Indian startup ecosystem as well. According to a Local Circles survey, 38% of Indian startups and SMEs have already run out of funds. 12% startups stated they had less than a month’s cash reserve, while only 16% respondents said they had enough cash for 3 – 6 months.

About 4% respondents of the survey said they had already closed down their businesses due to lack of funds. A dire warning indicating a deterioration of situation for the startups and SMEs. Almost 80% of the companies participating in the survey said that in the past three months, they had resorted to cost cutting encompassing all departments – operations, marketing, advertising, HR, and even deferred tax payments, to sustain their business.

However, some positive indication was also found. Share of companies expecting to experience growth in the next 3-6 months horizon increased from 13% in April to 35% in June. Still the reality remains that 42% startups and SMEs fear business closure. Only 14% startups and SMEs said they were expecting to benefit from the Aatmanirbhar Bharat stimulus package.

The primary reason for this view is the scheme limitation that allows only companies with pre-existing debts and loans to avail the benefit. Most of these companies are funded by venture capitalists, rendering them ineligible for the scheme. The only hope for Indian startups and SMEs in the current scenario is to find new financial aid that can assist in business sustenance for few months.

Sources:

Startup Genome – Click to visit page

Local Circles – Click to read report

Statista story on Coronavirus’ impact on startups

Statista story on Coronavirus’ impact on startups in India