How will COVID 19 change the trajectory of startups and VCs ?Deal Structuring & Mergers & AcquisitionsBy Alok Patnia
2020 has been a cruel shock to the global economy. COVID 19 has not only changed the ways of world working in the short term, but it has also cemented a long term radical shift. Firms that choose to capitalize on these underlying changes will succeed and the ones that don’t will get wiped out. Here, we will analyze how will COVID 19 change the trajectory of startups and VCs .
Black swan events, such as economic recessions and pandemics, change the trajectory of governments, economies and businesses — altering the course of history. Be it SARS pandemic of 2002 or The Black Death in the 1300s or the crisis of 2008.
With Covid-19, we are already seeing early signs of a shift in how consumers and businesses behave. Remote working is being encouraged by tech and non-tech companies alike, transport/conveyance sector profitability is getting impacted by low seat occupancy, supply chains are getting disrupted globally and retail stores are running out of health and wellness products.
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Expected long term disruptions include-
When we discuss how will COVID 19 change the trajectory of startups and VCs, we need to understand the expected long term disruptions that are expected to cause the same. These include:
- Assimilation of supply chains into more resilient ecosystem
There is an acute need for a more distributed, coordinated and trackable supply of components across multiple geographies and vendors while maintaining economies of scale. This would require global platforms to be erected that use sophisticated technologies such as 5G, robotics, IoT and blockchain to help link multiple buyers with multiple vendors reliably across a ‘mesh’ of supply chains.
- Power shift to smart cities and digital first businesses
As governments learn from the Covid-19 experience, focus will shift towards investment in favor of smart cities as it would be critical to have them in order better manage the next black swan event. Key players benefiting from this shift in gears would be smart governments, focused companies such as Cisco, Microsoft and Siemens as well as digital city startups across Europe and the US. With social distancing becoming a norm, going digital will no longer be a “nice to have” thing.
- More focus towards health and wellness in general and mental health in particular
With more and more distancing norms and digital workspaces, it is harder to figure out what will happen once a majority of the knowledge workforce needs to work together remotely, indefinitely. It is likely that this shift will impact morale, productivity and mental health of workers throughout the globe and businesses need to prepare for it. For companies looking to add the human touch digitally to their workplace, the choices are limited today — with Humu, a startup by ex-google HR chief Laszlo Bock, being in pole position to capitalize on this. A handful of other tech companies, such as Github and Automattic, which run predominately on a remote collaboration model can also choose to productize their insights and capabilities in order to help other companies cope. Several mental health startups such as Braive and Moment,Pebble can double down on solving the problem of isolation while business networking apps such as Ripple can help solve the mentoring and development challenges that come with being a remote worker.
How VCs and startups in India would evolve post-COVID-19
How will COVID 19 change the trajectory of startups and VCs?According to the International Monetary Fund (IMF), India is one of the very few countries expected to show positive economic growth, amidst the novel coronavirus outbreak that has put the world in a “Great Lockdown” and has brought about the worst recession since the Great Depression in 1929, dwarfing the Global Financial Crisis of 2008.’
The evolution of new age startups
Situations like COVID are like nature’s litmus test. It will weed out generic businesses and bring out more resilient business models. We can expect the new age startup to be more resilient, conscious, and frugal.
- Business models can see a shift from asset heavy to asset light model. This is also an opportunity for the startups to go back to the white board and assess if the products and services they were planning to launch would still be relevant in the post-COVID-19 world. Models that are fully digital will see significantly lower impact. In the longer term, once economic volumes are back to pre-crisis levels, we will see shift towards the online space.
- More and more focus will be on the shifting nature of consumer spending. 2.Due to COVID-19, indoor activities like OTT services and video communication have become essential services as well. Traditional shopping like that of apparel, consumer goods/electronics, etc, has become non-essential.Likewise, travel, hospitality, eating out, etc, are now clearly non-essential, if not dangerous. Consequently, start-ups focused on those businesses will see a significant downturn.
- However, a contrary view came up in a survey, where in consumers in the travelling sector are far more inclined towards resuming their travel plans as soon as services are resumed. This could be a boost to the travelling sector in general.
- COVID 19 will accelerate some market changes such as the transition to digital services, and help create market opportunities that would have otherwise taken years to emerge, thereby putting digital first startups at a higher pedestal.
- Compliance regime will undergo heavy transition. The Govt’s focus on digital measures, exemptions and relaxations that are being provided for online options, coupled with the rise of digital CFOs are bound to change the trajectory of usual compliances. Startups that are still depending upon physical means of compliances and local service providers are likely to be wiped out in the long run.
- Startups are expected to take their reporting and ratios more carefully, weeding out non-profitable customers, pivot processes and revenue streams that are not working and build a more resilient environment.
- Startups would now be more disciplined, implement scenario planning, would cut down on unnecessary expenses. They would treat cash very carefully, they would not be so generous in spending cash on marketing, ads, and discounts.They would introspect more on whether it is actually needed. Investors’ fund would be used more accountably.
- Concepts of Contingency planning, contingency fund has been gaining prominence and will continue to do so as a survival strategy for potential future black swan events.
The shift in the investors’ outlook
- Just like startups, investors would also now be frugal. There’d be a change in investors’ tolerance level for companies “that have no way of realizing bottom-lines and building up to at least 20% in margins”, as said by Pranav Pai, managing partner, 3One4 Capital, in an interview recently.
- Investors would also rethink their portfolio and capital allocation.
- Due diligence and other internal processes will undergo paradigm shift with more focus on digital means. Investors have been really active during these times and have been using digital means of video conferencing and file sharing for their processes.
- Arpit Agarwal, principal at Blume Ventures, recently told in an interview to one of Asia’s leading tech startup platforms, that “In a normal situation, you typically can’t expect the company to give you visibility on what they will be in four or five years from now. But it might make sense to now invest in companies that have a long-term tailwind horizon”.
- Goes without saying that tech investors also expect a pretty dramatic shift in consumer behavior who are now being forced to transition from offline to online services.
Startups that have been weathering the COVID 19 storm
Some sectors are also considering this hour of crisis as an opportunity to innovate their existing business models and create solutions. Also, some sectors are expected to recover the fastest post the COVID 19 scenario.
- Biotech startups
- Edtech Startups
- Drone technology-based startups
- Startups providing Holographic Video Conferencing
- OTT startups
Demand for Delivery Services is Up, But Supply Chain Faces Disruptions.
Due to the ongoing crisis and lockdown, the increase in the number of individuals staying home has led to a sharp growth in the demand for food and grocery in all major cities of the country. Start-ups that deliver medicine are also growing rapidly as customers stock up on drugs apart from hand sanitizers and masks.
But the challenge faced by these companies is the disruption in the supply chain. China, being the epicentre of the global crisis, is one of the reasons for the disruption in the supply chain, especially for pharma start-ups.
Furthermore, though there is strong demand from urban consumers, the ability of start-ups in the essential and food delivery space is significantly impacted since they are not able to activate their supply chains and delivery mechanisms.
In the fintech space, lending start-ups have not yet seen major disruption in their businesses. However, as an increasing number of existing customers will find it tough to make repayments, more and more people will need loans. This will see a spike in the NPA levels for these start-ups. Banks are likely to see an increase of 1.90 percent in their NPA ratios, as per S&P Global Rating.
However, in the medium term when the economy recovers, we should see an increase in online payments, as currency notes have been noted to carry the virus.
Software startups have seen a rise in demand but expect revenue decline.
Some software services like Zoom and Slack, have seen a huge increase in users over the past few weeks, Indian software or SaaS (software as a service) startups expect a decline in revenues as companies reduce overall spending.
Vertical SaaS companies that sell to speciality sectors like hospitality, travel, food and other sectors have been hit the most.
However, while SaaS startups face tough times ahead, there are newer channels of demand opening up. Freshworks, for instance, is seeing increased demand for products that enable companies to serve their customers remotely like a chat and call routing services. So has Zoho Corp.
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