Breakdown of Startup

India joined the global bandwagon of mushroom growth in startups in the past decade as young talented brains chose to become job creators rather than job seekers. The startup culture in India got a fillip with favorable government policies since 2016. The institutional support through the Startup India initiative encouraged and nurtured startups. Entrepreneurs were gung ho even as late as December 2019, when fresh startups were on the rise. It appeared as if there was no looking back.

Startup Landscape: India had the 3rd largest startup ecosystem in the world with 9,300 technology startups by December 2019. These firms provided direct employment to four lakh people and clocked a growth of 15% in 2019. With 33, India became home to the third-highest number of unicorns globally (unicorns are companies with a valuation of over $1 billion).

According to the research firm Tracxn, fund flows into tech startups were $14.50 billion in 2019 beating the previous year record flow of $10.60 billion. In such a favorable environment, startups made a beeline to leading B-Schools and technology institutions for campus hiring. In the e-commerce space, startups like Droom, Flipkart, Nobroker, Testbook, Toppr, and Udaan were on a hiring spree to lap up top talent. Few students of these premier institutions maintained social distance with campus placements and struck gold by striking on their own.

Modeling Startups

Decoding Startups: Majority of startups in India, like their counterparts around the world, chasing growth over profitability by tracing these five steps:

All through this journey from steps 1 to 5, a startup continued to bleed. The cash burn rate increased at an increasing rate as the firm evolved. Promoters before they ran out of cash identified and impressed risk capital investors to bankroll the venture. Post-money valuations hit through the roof as valuations got stretched with too many risk capital investors chased too few deals. This is the story in short of all the startups that grew to become unicorns in the business world.

Outbreak & Speed Brake: A complete lockdown was imposed in India to break the chain of transmission of Coronavirus from March 25th – May 31st, 2020. The outbreak of the Coronavirus pandemic in March 2020 had upended the startups. Revenues took a severe beating as demand came to a grinding halt. Employees were laid off, salaries were cut, expansion plans stalled, and projects were kept in abeyance. As credit lines across the board were cut, financial resources got dried up for these firms. Risk capital investors – Private equity funds and venture capital funds – that tap limited partners’ deep pockets for deployment in investee companies were struggling to mobilize. These investors not only refused to participate in subsequent rounds but also became desperate to liquidate existing illiquid portfolios. The worst-hit was startups, especially in the B2C space.

Current Scenario: A survey conducted by the tech industry body NASSCOM covering 250 startup companies during May 2020 revealed that:

• More than 90% witnessed a sharp decline in revenues.
• Around 40% were either shut or planning to shut down operations.
• Around 60% of the B2C sphere was on the verge of closure.
• Most vulnerable were early-stage and mid-stage ventures.
• Around 70% had a cash runway of fewer than three months.
• Edtech sector and B2B space were spared from the bloodbath with a marginal rise in revenues.

Conclusion

The current mood of startups appears to be survival in the short run and revival in the long run. Operational expenses have been cut to the bone to get a breather. They are aiming for productivity-led growth by opting for asset parsimony.

Upstream and downstream business partners are being subjected to penny-pinching to protect margins. Even job offers made on the campuses had been withdrawn and internships became unpaid. Will this be a permanent lockdown of startups?

DISCUSSION QUESTIONS

1) In the post-pandemic world, where do startups go from here?

2) What should be the survival strategy for startups in the B2C space?

3) Why do you think Edtech and B2B startup players got insulated from this collapse?

4) Is there any role for the Government to revive the startup ecosystem?

Dr. A Srihari Krishna

Dr A Srihari Krishna holds dual master’s degree in business administration as well as in finance & accounting.

He started his career as business journalist with ICFAI in 1993 where he tracked capital and currency markets for reporting in the ANALYST magazine.
Subsequently, in 1995 he joined Swell Financial Services – a merchant banking firm as a equity research analyst where he managed IPOs and structured venture capital/private equity deals.
In 1999, he joined academics and served institutions like Siva Sivani Institute of Management as an associate professor.
After submitting the doctoral thesis on “Monetization of Shareholder Wealth” in Osmania University during May 2006, he joined GE Money Servicing as a learning manager. He had trained credit underwriters on risk management practices across India and partner sites in the USA. He left GE in 2011 and since then remained a freelancer involved in teaching, training, and consulting.

Currently, he is an advisor with Engineering Staff College of India, visiting professor at Amity Business School, Narsee Monjee Institute of Management Studies, Galgotia University, ITM Vocational University, and Symbiosis University of Applied Sciences.

He also provides academic support to varied learning products of IFHE for their executive MBA program in the capacity of an adjunct faculty.

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