9 min read.Updated: 17 Feb 2021, 08:31 AM ISTMihir Dalal
Many feel an economic downturn is the best time to start up. How do freshly minted Indian promoters fare?
This flood of early-stage activity has prompted investors to pause and consider whether the factors boosting early-stage startups in sectors like education and health will sustain post pandemic.
After India announced a nationwide lockdown in late March 2020, Siddharth Biyani, a Gurugram-based executive with online marketplace Snapdeal, went home to his family near Bhopal. There, Biyani found that many of his family members and acquaintances were struggling with online ordering, overwhelmed by the volume and variety of goods.
Biyani helped them place orders and in the process hit upon a business idea: bringing e-commerce to the masses in tier-two cities and below who weren’t well served by existing online retailers. In June, Biyani quit his job, and next month, along with his friend Amit Sharma, a serial entrepreneur, he co-founded Bizztm Technologies Pvt Ltd, an e-commerce platform that supplies a curated product catalogue to local stores in small cities.
Though incorporating the firm and getting it off the ground had been frustrating because of covid-19 constraints, by October, Bizztm had started to see early proof that its idea was working, as hundreds of small stores signed up on its platform.
Then, Biyani and Sharma got covid-19. “People in tier-two cities had resumed normal life by August-September so we had to do meetings with store owners. We are both young (around 30) and healthy, and we thought that even if we get it, we’d survive. But isolation was one of the hardest things I’ve experienced. To be alone in your room, and not being able to do anything when you’ve just started up—it was terrible," Biyani said. Both of them had mild cases and recovered quickly, and later raised $200,000 in capital with plans to raise another $2 million.
Bizztm is one of the few hundred tech startups that were launched in India during the pandemic.
Though startup formation declined last year, the proportion of ‘quality’ entrepreneurs—people with deep sectoral knowledge or startup experience, or repeat entrepreneurs—rose substantially, according to investors and founders Mint spoke to. The daunting challenge of starting a company during the pandemic, which has also accelerated digitization in many businesses, had the twin effect of putting off some dilettantes and nudging the more serious-minded fence sitters to take the entrepreneurship plunge, these people said.
One of the cherished myths of the tech business globally is that economic downturns are the best time to start new companies. Believers point to the examples of Uber, AirBnB, Apple and Microsoft as proof. But whether that is true or not, those who started out last year believe that if they could come through the crisis period of the pandemic, they can handle any adverse macro environment.
“Covid was a call to reality—the faint hearted or frivolous weren’t setting out to be entrepreneurs," said Ganapathy Venugopal, chief executive officer at Axilor Ventures. “On the other hand, serious people who were otherwise unsure saw it as an opportunity because digitization went up dramatically across sectors. The average age of founders last year went up; there was a sharp increase in entrepreneurs with domain expertise."
What helped these startups was the resilience in early-stage funding. Angel investors who made money off surging stock markets as well as institutional venture funds poured capital into startups in the second half of 2020. The number of seed-stage funding rounds touched 770 last year (most of these companies were started before the pandemic), according to Tracxn Technologies, a data platform.
While it declined from 1,031 rounds in 2019, the fall was much lower than most entrepreneurs and investors were expecting in the first half of 2020, when the rapid spread of the pandemic and the nationwide lockdown prompted a complete freeze in investment activity for months.
The choice of sectors of last year’s founders—education, gaming, social networking, health, software-as-a-service and e-commerce—was shaped to a large extent by the unique conditions created by covid-19.
But the fate of these pandemic startups will only start to become clear once the pandemic ends. The environment that shaped their early development is changing rapidly as transmission rates fall. How business will look in a post-pandemic world is still unclear.
What may determine these startups’ staying power and success is the ability of their founders to judge whether the fundamental forces driving their businesses were temporary effects caused by the pandemic or more enduring shifts: in short, their ability to judge the need, extent and pace of digitisation.
All thanks to covid
Much has been written about the pros and cons of how large and small companies have adapted to the pandemic. But launching companies from scratch last year presented both unique opportunities and problems quite different to those of firms that had been around before covid-19 struck.
To start with, the chaotic business environment created by the pandemic proved to be fertile ground for new startup ideas in some sectors.
Khet Singh was in the first year of his MBA course at IIM-Bangalore last March when classes went online. Singh had worked at startups in the past and had decided to become an entrepreneur after his course ended. Having little interest in attending online classes, he brought forward his entrepreneurship plans after reading reports that hospitals were putting off regular surgeries to deal with covid-19 patients.
“You can have insurance, but when hospitalization happens, things often go wrong. There’s a lot of ambiguity and the claims processing system is very inefficient. So there is a clear need for someone who could help patients and hospitals figure out how to process insurance claims. Now with covid claims, no one was sure if their insurance will cover it. And I also thought that no investor was going to fund you if you weren’t in education or health," Singh said.
In early June, Singh and his friend Ajit Patel launched ClaimBuddy, an insurance processing startup, in Gurgaon. They chose to hire office space in a building that housed a diagnostic centre, as only essential services were allowed to operate freely without ambiguity.
Entrepreneurs said that the crisis prompted them to focus on generating revenues as quickly as possible and spending more frugally than they otherwise would have. It also forced them to digitize almost all parts of their business—hiring, recruiting suppliers, signing up clients—and design processes accordingly.
When FanPlay Technologies, a gaming and social networking platform built around influencers, was launched late last year, the company was forced to build live video infrastructure and processes for the influencers remotely. The company’s founders, Bharat Gupta and Pritesh Kumar, couldn’t meet any of the influencers it had signed up.
“It was very tricky to get the livestream going initially and we couldn’t be there on location with the influencers to solve the problems. We would have usually done it from a studio and probably tried to build expensive video infrastructure. But we had to do everything remotely, which helped us scale even faster. We’ve realized that we can onboard influencers from any place," Gupta said.
As people spent more time online, customer acquisition costs were lower than usual in businesses like gaming and health while some software businesses were able to sign up most of their clients through digital sales.
Early stage startups saw mixed results in hiring. As high transmission rates made in-person meetings unsafe, startups were forced to recruit people remotely. Those entrepreneurs who had startup experience were better placed to recruit people because of their existing networks.
After Desta, an agriculture e-commerce firm, was forced to shut down because of a shortage of capital in April, Siddhartha Choudhary, who had been hired to run the firm as a professional CEO, decided to launch his own startup, Helicrofter, in agri-tech. He hired the entire workforce of 30 people from his previous firm.
“It would’ve been very difficult to start an agri-tech company during the pandemic unless you had previous experience because it’s such a complex business. We were able to do it because the team believed in the idea, were comfortable working with me and had on-the-ground know-how," Choudhary said.
Cultivating a vibrant work culture for companies whose employees had never met each other proved to be elusive. Attempts at group activities met with little success. One evening in June, employees of Cora Health, a new health food startup, decided to watch a Netlfix movie together from their respective homes. But they were so tired that half of them fell asleep before it ended, the company’s co-founder Snigdha Kumar said.
Unsurprisingly, the entrepreneurs Mint spoke to said that though it was cheaper to work remotely, they had already taken up office space for part or all of their staff.
“In December we realized that our product work had stagnated," said Sourav Sanyal, the 20-year-old co-founder of OurEye, a new surveillance technology startup founded in August. “We had hired our entire team through LinkedIn and hadn’t met them. That emotional conviction was missing. So we decided to open an office, and everyone said, ‘We’re coming immediately.’"
In many countries, startup formation has risen during the pandemic. According to a 30 December report in The Financial Times, startup formation in many countries including the UK, France and Germany increased in the second half of last year. The US registered a record number of new company applications in the third and fourth quarters of 2020.
As mentioned earlier, in India, startup formation declined last year. But investor appetite for early stage startups remained strong. LetsVenture, a startup funding platform, doubled its investment pace in 2020 to 102 deals partly on the back of a surge in new investors on its platform. Many new angel investors who backed startups last year were 35- to 40-year-old professionals, said Shanti Mohan, co-founder and CEO.
“Spending has reduced, credit cards bills have reduced because you can’t go anywhere—what do you do? They had a flush of extra money. There are more exits within the startup ecosystem now like secondary exits and Esop (employee stock ownership plan) buybacks, which are boosting investments as people are reinvesting the money in startups," Mohan said.
Angel and seed investment activity was among the highest in years in the second half of 2020, said Sanjay Mehta, founder of venture fund 100X.VC. “HNIs (high net-worth indivduals) who had made a lot of money on the stock market were looking to diversify and they identified tech startups as an attractive investment area."
This flood of early-stage activity has prompted investors to pause and consider whether the factors boosting early-stage startups in sectors like education, health and software will sustain once the pandemic ends.
“A lot growth investors are backing away from deals because they’re saying, ‘Your companies have got a covid tailwind, and we don’t know if it’s going to sustain in 2022 (when the pandemic ends) so we don’t know if the present numbers are legit,’" said Karthik Reddy, managing partner, Blume Ventures. “What early-stage investors need to do is build a strong, organic view on what behavioural shifts in sectors are becoming permanent."
There has to be a compelling reason for people or businesses to stay online and not go back to their old ways of working or shopping, said Dev Khare, partner, Lightspeed India.
“One indicator is the rise in volumes—if business is 2X higher than before, then it’s a grey area but if it’s 10X or 20X better, then it’s hard to believe that things will go back. In China, for instance, online gaming has reverted to pre-covid levels. But the increase in online grocery is sustaining," Khare said.