Why Covid-19 may alter startups forever

In October 2008, Sequoia Capital, one of the world’s best-known venture capital firms, had issued a missive to its portfolio companies titled R.I.P. Good Times in the wake of the global financial crisis. Warning of an apocalypse for technology firms, Sequoia advised its companies to reduce costs and start generating profits as soon as possible.

Earlier this month, Sequoia again published an open letter offering similar advice to its portfolio companies in response to another global crisis that is fast becoming even more serious than the great recession. Calling the coronavirus outbreak The Black Swan of 2020, Sequoia warned that it may be contained only after “several quarters” and it could take “even longer for the global economy to recover its footing”. The fund urged its portfolio companies to “question every assumption” about their business, and consider cutting jobs and spending.

Even before Sequoia’s warning, startups in India had already started seeing the chaos unleashed by the coronavirus. Investors and entrepreneurs say this is easily the worst crisis for startups, and for the broader economy, since the Great Recession.

In every aspect of their business, from fundraising to customers to employees and suppliers, internet startups—like other companies—are struggling to cope with the impact of the virus. Some are scrambling to save their businesses from collapse.

The founder of one unicorn startup, on condition of anonymity, said that after an emergency board meeting, his firm is drawing up contingency plans that include job cuts and the suspension of operations in several cities. If the virus spreads in India, many startups will be forced to do the same, he added.

Finding the next round of capital, in particular, has become problematic. And it is going to quickly turn into a cash flow problem for firms that have until now given priority to customer acquisition instead of generating profits. Fundraising across stages has slowed to a near halt.

Chinese investors, who have been among the most prolific backers of Indian startups in recent years, have put off deals across the board. Domestic venture capitalists (VCs), too, are delaying making investments as they cancel or postpone travel and meetings. Deal-making in the startup ecosystem involves a lot of travel as VCs based in Mumbai, Bengaluru and the Delhi National Capital Region regularly circulate between these cities, which host a majority of funded startups.

Some large funding deals for companies in transportation, and food and grocery delivery are likely to be delayed because of the virus, said two people familiar with the matter. Dozens of smaller funding deals have already been postponed.

“For those startups that are not making a profit, it is an important time to ensure that they have enough liquidity and that they are fully funded for the next quarter,” said Niren Shah, managing director and head of Norwest Venture Partners India. “And we need to make sure that firms are able to control the burn rate at this time. Because in some geographies, we expect revenues to undergo significant reductions since demand and supply are going to be impacted in many segments. But we see this impact only in (the) short-term.”

This short-term impact on internet startups so far has been mixed, though all businesses are struggling to cope and the environment is changing almost daily.

Startups that provide flight and hotel bookings have naturally been the worst-hit. The so-called gig-economy firms including Ola, Uber and Airbnb, too, are seeing a drop in demand. Co-working spaces in Bengaluru and Gurugram have already seen a fall in attendance since last week. All these sectors will suffer more in coming weeks with the travel sector likely to see a fall for many months to come.

However, startups in some other sectors are witnessing a sharp increase in business. Videoconferencing firms, for instance, are adding hordes of users as companies conduct meetings online. Gaming, streaming and online education content providers are all reporting a significant increase in users and time spent on their platforms.

Demand for food and grocery in metros is rising sharply as increasing numbers of people stay at home during the crisis. Orders at medicine delivery startups are also increasing as customers stock up on drugs apart from hand sanitizers and masks. Even these firms are facing serious challenges in their supply chains. Online pharma companies, like their physical counterparts, will face a supply crunch because of the continuing lockdown in the Chinese city of Wuhan, the epicentre of the crisis globally. Many Indian pharma firms rely on Wuhan for the supply of active pharmaceutical ingredients, which are then used to make finished drugs.

What makes the impact of the virus especially difficult to estimate is that few seem to know the exact or even proximate number of cases in India. While the number of officially identified cases is low—under 150—at the moment, some experts have warned that the actual number could be higher simply because India hasn’t tested enough people. Among all the countries hit by Covid-19, India has the lowest rate of testing, according to World Health Organization data. This uncertainty brought about by the crisis has inevitably sown chaos at internet startups.

Mint looks at the impact and the path forward for startups across some key sectors in the wake of the pandemic.

Travel

Globally, the travel and tourism sector has been the worst-hit. In India, too, bookings for flights, homestays and hotels have all witnessed a significant dip, especially after the government placed visa and travel curbs on international routes.

Online travel aggregator Yatra.com said around 35% of confirmed tickets (flights and hotels) to international destinations from India has already been cancelled by customers and airlines themselves.

“Airfares have dropped by 40% to affected destinations. There has been about 18% drop in hotel rates and we are receiving cancellation requests from various travellers who are wary of taking up trips domestically as well,” said Sabina Chopra, co-founder and chief operating office (corporate travel) and head (industry relations) at Yatra Online Pvt. Ltd.

Travel on domestic flights, buses and trains has not seen a major dip yet, according to online agents and tech startups aggregating these services. “On domestic (flight travel), we haven’t seen much impact yet. We have seen rescheduling and cancellations coming in. We have a substantial user base on the train side, who have now migrated to booking domestic flights because airfares are also down by 30%,” said Aloke Bajpai, chief executive of travel search engine Ixigo.com.

However, domestic travel bookings are also expected to slide in the next two weeks as states such as Maharashtra and Karnataka have seen a rise in the number of infected cases.

Transportation

Ride-hailing platforms Ola and Uber have seen a slight drop in demand over the past 10 days as many companies have told their employees to work from home. However, demand for conveyance hasn’t collapsed yet, as many people still continue to go out for work, to eat, drink and shop.

On the supply side, Uber and Ola have issued hygiene guidelines to the hundreds of thousands of drivers on their platforms. Both firms have requested drivers to visit their walk-in centre to pick up masks and hand sanitizers. Last week, Uber said that it would compensate healthcare costs for its drivers in case they come in contact with the virus. However, at least 10 drivers that Mint spoke with in Delhi, Bengaluru and Mumbai said they have received no such communication.

Apart from this, urban mobility solution provider Bounceshare has announced a reduction in the minimum fare for its self-drive two-wheeler rental service. The firm has also waived off the security deposit required for new users, to ensure easy access to scooters in case of an emergency.

Commerce

Online retail, and food and grocery delivery companies said demand has risen sharply in the past few days.

Grocery e-tailers like Bigbasket and Grofers are facing a supply crunch as users stock up on essentials. On Monday morning, Bigbasket’s app displayed an “out of stock” tag on many essentials like atta, grains, milk, tea and other non-perishables. Bigbasket and Dunzo users also took to Twitter after many of their orders were automatically delayed or cancelled even after they had been paid for.

Grofers said even though order volumes have increased over the last few weeks, it has not faced a supply crunch yet. The firm has also stepped up efforts to ensure “availability and access of critical goods while maintaining prices of products on the platform”. Grofers said it was “committed to sticking to honest pricing—at a time when the market prices are skyrocketing”. Precautions have also been taken to avoid any contact between those involved in the online delivery supply chain and physical visitors to grocery stores, it said in a response to Mint’s queries.

All these firms have stepped up their efforts to help employees deal with Covid-19. While large firms such as Flipkart, Myntra and Amazon have instructed permanent employees to work from home, their on-ground delivery staff is set to receive free insurance and health cover.

Delivery and services startups including Urban Co., Grofers and Swiggy have promised to provide full health insurance cover for delivery staff in case they become infected. “Should a delivery partner notice any associated symptoms, they’ve been asked to immediately reach out to us and consult a medical professional. We are providing them with free medical consultation through our partners in such cases. To ensure their financial safety, we are committed to supporting them financially in such situations,” said Swiggy in a response to Mint’s queries.

Fintech

Lending startups have not yet seen a major disruption in their business. Soon, however, they will have to deal with a paradox: more people will need loans even as an increasing number of existing customers may find it tough to make repayments.

Anuj Kacker, co-founder of MoneyTap, said that the lending platform is expecting some borrowers to miss their repayment deadlines due to salary credit delays and because of rising expenses, as they try to stock up on food and other essentials.

“We already have a grace period of five days. In certain cases, where we have the borrower write to us explaining why they missed the payment date, then we are also giving an extra grace period to those people,” added Kacker.

When asked whether the startup is considering tweaking its existing credit rating algorithm to offset the Covid-19 risks, he said that no such changes are being made currently.

Kacker and other experts warn that even the number of loans being processed will see a hit if the Covid-19 epidemic spreads in the country. “…if the pandemic situation gets worse, then I think we will be forced to lend to good quality borrowers only: people with proven repaying habits, and good scores,” added Kacker.

Investors and startup founders say lending firms might come out with new credit products focused at serving customers who may be hit financially by the pandemic. “Workers in the daily wage economy could be asked to quit their jobs and go back to their homes because of low demand and sales,” said Anup Jain, managing partner at Orios Venture Partners. “Then, this might impact earnings, and his or her family income, and I won’t be surprised if fintechs start modelling some credit product towards this.”

Meanwhile, insurance startups are seeing a sharp increase in demand, and in most cases this is translating into actual business as some startups have begun offering products to cover the Covid-19 treatment cost. Earlier this month, Insurance Regulatory and Development Authority of India asked insurance providers to introduce policies to cover treatment costs for the disease.

Wealth management startups are expected to see a drop in business as market volatility is at its peak in recent years. During periods of volatility, people typically avoid investing and sit tight.

The impact on payment apps is not yet clear as the country’s financial system is already reeling under the burden of Yes Bank’s collapse. On the whole, caution and a wait-a-watch approach are clouding the mood within the world of startups.