In January, I had written a piece (bit.ly/2UdjPqC) asking what’s next for Indian startups. The imminent reckoning in store for startups in that article now seems like a prescient warning: ‘But now is the time to course-correct. Some of these sentiments were seen post the 2016-17 lull period, but again a hopped-up environment followed in just about a year. This time around, though, it’s far more serious and with some of the biggest unicorns being asked hard questions on business feasibility, massive losses and how they will clock profits, 2020 is a critical year for the highly capitalised startups.’ No one, of course, could have predicted that course-correction was just two months away as Covid-19 hit the world, and India.
Has business-crippling pandemic come as a final clarion call for Indian startups, founders and even the risk investors who propped up valuations of young companies? And will this unprecedented global event push many loss-making, bloated and extremely imprudent venture capitalist (VC)-funded startups to cut flab and brace for the new reality?
This time it’s clear, startups will have to understand that businesses have always been started to make money, even if the journey to that goal is long. The endgame is only one — until, of course, you’re a not-for-profit gig.
While milder blips and bumps have come and gone in the past few years, these extravagant, cash-guzzling startups have lived on. But what is happening today has truly never been seen before, as revenues have cratered to zero for many firms and they need to conserve cash. These companies didn’t exist during the dotcom crash back in 1999-2000, and most weren’t around in the 2008 financial crisis either. Which means the scale of layoffs, pay-cuts and a general sense of urgency to get one’s house in order is new.
A theme running across all companies is how the pandemic is affecting businesses. But let’s stop and think. Didn’t most of these companies need this pruning and shedding anyway? And many of them did not have a case to survive if it weren’t for constant infusion of investor capital. While it’s easy to blame the virus for the layoffs and the state these hyper-funded startups are in today, many of these fledgling companies may have had to make deep cuts anyway to survive as they still find the right business model that can make money.
AVC told me recently how several of his portfolio companies were going to sack 50-70% of their staff. I asked if that’s only because of the pandemic, or because of fundamental questions around the business. I was given to understand that the Covid-19 crisis has simply shortened the runway, and expedited the eventualities like no one had imagined. But the problems in the business were not new.
We have been in a bull run for technology startups for over a decade. Indian tech startups have gained majorly from the post-Alibaba IPO boom, and money has poured in abundance from global investors — be it Tiger Global, SoftBank, Naspers and a bunch of Silicon Valley venture funds in the past 6-7 years.
VC-backed startups sop up capital, and that’s alright. But to not be able to figure out a way of making money after raising billions of dollars in funds won’t be acceptable as investors will pull back like never before. When capital is easy to come, businesses don’t seem to follow the age-old path of making sound decisions of not over-hiring and expanding into too many non-core projects. They instead just push for growth.
‘Founders, egged on by investors, only cared about growth. They did not care about the quality of growth, it was all about getting the next round at a higher valuation and chasing more growth. This approach was getting questioned far more towards the end of last year as profitability was elusive. The crisis has forced everyone to rethink,’ an investor said while discussing the state of play.
The layoffs are clearly to extend a company’s runway, because visibility on the next round of capital is low. The question on finding ways to be self-sustainable without outside capital was relevant pre-Covid. It’s only gotten far more amplified now. And companies will survive this crisis by transforming and pivoting, as well as by innovating.
This View: Start up and smell the Covid crisis was originally published on https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/view-start-up-and-smell-the-covid-crisis/articleshow/76223546.cms