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More than 250 startups shut shop in the past two months.
More than 250 startups shut shop in the past two months.

Startups brace for the worst amid lockdown

Firms in edtech, fintech and health tech sectors have reported a boost to businesses since the lockdown started

Indian startups are bracing for the biggest shakeout in the country’s history as the coronavirus pandemic has shut down entire sectors of the economy, drying up revenues and funding.

Startups that set out to disrupt entire industries are themselves getting disrupted. Many have quickly pivoted to slashing costs and conserving cash from their mantra of “moving fast and breaking things".

Even before covid-19 struck, internet startups were facing a downturn but the pandemic has demolished any hope that they would manage a soft landing. After years of heavy spending and failure to turn profitable, many startups are now unable to secure capital to survive a prolonged crisis.

“Consumption has been severely impacted, thus resulting in falling revenues and declining consumer base. This is resulting in massive layoffs and salary cuts even at the bigger startups," said Apoorv Ranjan Sharma, co-founder of Venture Catalysts and managing director of 9Unicorns Accelerator Fund.

The crisis, unprecedented in recent history, will lead to large numbers of startup failures, as deprived of capital, ill-conceived business models will collapse, investors said. A spike in mergers and acquisitions is expected over the coming year, driven largely by investor attempts to cut losses and save face.

Over the past two months, more than 250 startups have already shut shop, according to researcher Tracxn Technologies Pvt. Ltd, which calls the list “Deadpool". This number may rise sharply in the coming months. More than 14,000 startups shut shop since Tracxn started tracking them in 2016.

While smaller startups are certainly facing the brunt of the lockdown, even unicorns are unlikely to remain unscathed.

In the past week, Swiggy and Zomato announced major job cuts, even after raising over $100 million each earlier this year. Sriharsha Majety, co-founder and CEO, Swiggy, told staff that while it raised capital just before covid hit and has sufficient runway, “it is incredibly important to prepare for worse scenarios".

The pandemic has posed the biggest challenge for the ecosystem, with about 90% of firms reporting a decline in revenues, 30-40% temporarily halting operations or are in the process of closing down, and 70% having a cash runway of under three months, a survey by industry body Nasscom showed.

It has affected early-stage and mid-stage startups the most, the survey said, with those in edtech, fintech and health tech reporting a significant boost to their businesses since the lockdown started.

“Investors will start looking at how founders handled the crisis, and how they handled issues like delayed payments and furloughs…whether they have been transparent and how they have communicated with employees and business partners," said Vinod Murali, managing partner, Alteria Capital, a venture debt investor whose portfolio includes Vogo, Faasos, Generico and Dunzo.

Out of 1,000 startups with short runways, some 200 will not get any funding, and 30-50 startups may end up raising venture debt, Murali said.

“Post covid is much like post World War II, it will change user attitude and the industry. Over the next 12 months, we anticipate the conversation around fund-raise will focus on contribution margin made from goods sold and revenues made, not merely top-line growth," said Suchi Mukherjee, founder, Limeroad, an e-commerce apparel firm.

Investors said they are rejecting requests for follow-on funding from portfolio companies. “We’ve had to go back on our word... We’ve apologised but we don’t have an option. It’s a matter of survival even for us," said a partner at an early-stage fund.

Salman S.H., Nandita Mathur, Tarush Bhalla and Mihir Dalal contributed to the story.

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