Impact of COVID-19 on the Start-Up Sector

The COVID-19 pandemic has had a severe influence on the entire investment industry. While businesses in all sectors are suffering from the impact of COVID-19, start-ups have been one of the most vulnerable groups. They have been facing various formidable challenges both from a business and an operations perspective. Most of the start-ups have witnessed a decline in supply and demand, except for those engaged in the supply and delivery of 'essential services,' educational technology, gaming, or streaming services.

The COVID-19 crisis caused severe stress in most sectors of the Indian and global economies by directly affecting supply chains and cash flows through industries. The pandemic had a much greater impact on some industries, such as travel and hospitality, while others, such as health and education technology, saw a huge boom. One of the main concerns for young start-ups was a lack of cash flow and the possibility of having to shut down operations due to the pandemic. This economic outfall for start-ups and what it means for an industry that has risen prolifically concerned all stakeholders. Reports at the beginning of 2020 highlighted the information vacuum about how the virus spreads would significantly impact start-ups working in food delivery, last mile connectivity and other services. The start-ups operating in essential services adopted agile business models to keep up with the challenges and showcased great innovativeness and frugality.

According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the COVID-19 pandemic has had an impact on about 70% of Indian start-ups. 12% of the start-ups had to shut down their operations, and 60% have been operating with disruptions. It stated that 68% of the start-ups are majorly cutting down their operational and administrative expenses. About 33% of start-ups said investors had put investment decisions on hold and 10% stated that deals had been called off. Only 8% of start-ups received funds as per deals signed pre-Covid. The reduced funding has led start-ups to hold their business development and manufacturing activities and has resulted in the loss of projected orders.

Start-ups that provide flight and hotel bookings have naturally been the worst hit globally. The gig-economy firms, including Ola, Uber, and Airbnb, had seen a drop in demand since the start of the pandemic. Co-working spaces have already seen a fall in attendance since 2020. All these sectors suffered more, with the travel sector likely to see a fall for many months to come. Bookings for flights, homestays, and hotels have plummeted, particularly since the government-imposed visa and travel restrictions on international routes. Customers and airlines have already cancelled around 35% of confirmed tickets (flights and hotels) to international destinations from India, according to online travel aggregator Yatra.com.

However, start-ups in other industries saw a significant increase in business. As companies conduct meetings online, video conferencing applications such as Teams and Zoom are gaining a large number of users. Gaming, streaming, and online education content providers have all reported an increase in users and time spent on their platforms since the outbreak. As more people stay at home amid the crisis, demand for food and groceries is skyrocketing. Orders at medicine delivery start-ups are also increasing as customers stock up on drugs apart from hand sanitisers and masks. However, even these firms are facing serious challenges in their supply chains.

Users are stocking up on essentials, putting a strain on grocery e-tailers like Big basket and Grofers. Many essentials, such as flour, grains, milk, tea, and other non-perishables, were marked as "out of stock" on Bigbasket's app for the majority of the weeks in 2020-2021 as the reliance on online shopping increased with the increased fear of the virus. Users of Bigbasket and Dunzo took to Twitter after many of their orders were automatically delayed or cancelled, despite the fact that they had already been paid for.

Because of the lockdown in Wuhan during 2020, China, the epicentre of the global crisis, online pharma companies, like their physical counterparts, were facing a supply shortage.

In a range of industries, Chinese investors, who have been among the most active backers of Indian start-ups in recent years, have put agreements on pause. Domestic venture capitalists (VCs) have also been delaying investment decisions by either cancelling or postponing travel and meetings.

Meanwhile, insurance start-ups have been seeing a surge in demand, which is translating into actual revenue in most cases, as several start-ups began to offer products to cover the cost of COVID-19 treatment during the peak period of virus transmission.

As the market volatility has increased in the recent years, wealth management start-ups are expected to see a drop in business. People tend to avoid investing and sit tight during periods of high volatility caused by the pandemic.

In the first three months of 2020, venture capitalists' funding plunged 20% globally and 50% in China. As a result, demand has also dropped like a rock for most new companies, and most of the start-ups saw their revenue decline since the start of the crisis, while the average start-up experienced a revenue decline of about 30%. Many start-ups saw their revenue fall while only a few experienced significant growth. Asia has suffered the worst impact of any continent, with start-up revenue contracting by more than 35% since the crisis, followed by Africa. Likewise, South America, North America, Europe, and Oceania also witnessed severe decline.

Start-ups are now trying to respond to changing consumer demand by opting for the logistics, delivery, and IT industries. For example, according to an analysis conducted by the University of Kent, online trading was the driving force behind the start-up boom in the first eleven months of 2020 in the United Kingdom. Real estate had truly seen the introduction of digitisation throughout 2020 when viewings of properties were diverted into the online environment. Some start-ups have recognised the digital trend and have begun to provide industry-specific services. Witly, for example, allows real estate agents to advertise their ads on Facebook and other social media platforms. The company promotes its services as time-saving and CRM tools that allow real estate brokers to focus on finding clients rather than administrative responsibilities.

Given the pandemic's global scope and the resulting uncertain economic conditions, start-up fundraising is likely to become a significant challenge in the future, as various investors may choose to concentrate their future fund deployments solely on existing portfolio companies in order to ensure that they can weather the current global crisis.

Since new investors may now demand bargains or discounts in the value, start-ups are likely to face intense negotiations on deal valuations, potentially delaying deal execution and closing. As a result, investors may adopt a more cautious approach towards funding and insist on thorough diligence (both commercial and legal) of the subject start-ups' business prospects, including any/all contingency plans implemented during the COVID-19 to ascertain the sustainability of the start-up in the longer-run.

Several regions, like the United Kingdom and France, have announced a start-up relief package that involves providing funds to invest in start-ups as well as offering loans and financial aid to start-ups. For example, France established a EUR 4 billion fund to support start-up liquidity, including bridging start-up funding rounds. Germany announced a tailored start-up aid programme aimed at expanding and facilitating venture capital financing, and the United Kingdom announced a co-financing fund for innovative companies in financial distress.

India is also considering adopting a more official and comprehensive relief programme that would enable access to cash while also establishing an effective monitoring system to examine how the monies are being used. Furthermore, start-ups play a vital role since they stimulate homegrown entrepreneurs to innovate and provide job prospects. Given the immense potential that start-ups have created, prompt and proactive action by the relevant regulatory authorities will be critical in determining the country's start-up network's future.

According to the National Association of Software and Service Companies, education, healthcare, and other digital technology start-ups in India have begun to exhibit exponential rise (NASSCOM).

Increased tech and digital adoption are expected in the start-up ecosystem as a major fallout of COVID-19. Also, opportunities may arise in setting up manufacturing/assembly units due to the realignment and localisation of supply chains and concerns around China as the predominant manufacturing source. Upskilling, reskilling, and multi-skilling will all be part of the human resource element to meet the demands of changing work styles.

Analysts predict the growth rate of entrepreneurship in the post-COVID-19 economy will continue to be high, aided by the rate of vaccination of the population and the passing of the turning point in the fight against the COVID-19 pandemic.

*At Expert Market Research, we strive to always give you current and accurate information. The numbers depicted in the description are indicative and may differ from the actual numbers in the final EMR report.