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How Indian Start-up ecosystem will likely come out stronger in 2022, post Covid19 struggle

That we are facing a crisis of the gravest proportions in recorded history is beyond doubt, and our healthcare, economic and societal systems are witnessing unprecedented challenges. We were already living in an over-leveraged world, where our economic momentum was being sustained by borrowing (from future generations) to keep spending. So, when the pandemic struck, and lockdowns — social as well as business — and distancing became the norm, the world economy never stood a chance.

In such a situation, big established businesses, especially the ones with high debt, or those focussed on discretionary spending, or from specific sectors like hospitality and aviation; are all struggling in the deep, and many will not survive the current economic shutdown. See below for a hand full of big brands filing for bankruptcy in the US, within 2 months of COVID 19 spread.

So, how will start-ups cope with all this? Companies established in the last 2-3 years, which lack a compelling revenue base, will have to fight hard for survival and cash flow. As an example, from amongst the globally admired fintech firms, the US-based thematic investing platform, Motif, which had raised $125m and had the support of Goldman Sachs, has had to shut down.

Start-ups create VALUE, whether they succeed or fail

Before reading further on a little realistic but “grim” prognosis, let me highlight something I firmly believe: that even if start-ups fail, they lead to progress for human society and offer tremendous learnings for the entrepreneurs. Money can come and go, but these learnings stay with entrepreneurs forever.

As an example, Tesla was started in 2003 by Martin Eberhard and Marc Tarpenning and Elon Musk had only invested in them in 2004. Elon Musk got involved after these cofounders left in 2008 or so, and lead the company through turbulent times to a massive success over a decade later, up to a point where now Governments and all other Car companies are forcing each other’s hand to go completely electric within this decade. This will help the humanity by getting rid of fossil fuels, reducing pollution, improving the climate. If it were not for Tesla co-founders in 2003, in spite of their “failure”, mankind may not have achieved this level of progress in cleaner energy automobiles in 2020.

Existing challenges in the Indian start-up ecosystem in the BC era (before corona)

Getting back to the toughest phase of start-ups in Covid19. Let’s face the realities. India is even a tough place to do business even for established businesses, surely more so for start-ups. Here are some hard points one could take in perspective, about the Indian start-up eco-system.

1. Indian start-up ecosystem has been around a couple of decades since VCs have been investing (dozens of billions of dollars) in Indian start-ups, but not any / many of the start-ups are on a sustainable model to become a proper self-sustaining business, YET.

2. Lack of Business Model – Deep discounting & Buying market share are not sustainable business models, even if your investor includes the largest VC like Softbank. Remember

3. No* start-up has been able to qualify Indian capital market rules (continuous profits for 3 years) to get listed on Indian stock exchange and give exits to its investors.

4. Remember it takes at least 7-8 years to build a new business in India. The start-up ecosystem cannot accelerate it by putting in more money,

a. You cannot out 9 mothers together and make a baby in 1 month. It will take 9 months

b. AND you cannot put 9 mothers together to have 9 babies in 9 months, mothers will fight.

5. India is a tough place to do business. In the last decade or so, even the big established businesses have struggled to survive and some have shut down. Most businesses have to struggle with government rule changes that are not practically thought through and become a nightmare for entrepreneurs. For example,

– Start-up tax

– Demonetisation

– Tax notices – Indian tax officials have tax collection targets. Let this sink in.

How can a start-up survive or sustain in this market within the Covid-19 world which may last for quarters to years? It’s damn tough. A lot of stars need to be aligned for the <1% start-ups in India to survive/sustain over the next few years. Here are some quick short tips for surviving COVID-19 times,

1. If you are VC funded – hopefully your VC’s skin is deep enough in the game for him to not abandon you. Raise more from your VC as needed, conserve cash, and try to survive for the next 1-2 years with minimal cash burn, and adapt as needed.

2. If you are not VC funded – Firstly, Good Luck. Conserve cash, try to focus on revenues if you can, adapt/pivot if you have to, reduce costs in the fairest way possible, and find a way to survive the next 1-2 years. In the worst case, if you don’t think all this is going to work now or in the near future (during or post covid19 world as many things will change), consider to shut down.

Light at the end of the tunnel – 2022 shall be bright for start-up eco-system

It’s very likely the world and India will start recovering in 2021/22. This crisis would have let to a big social, economic, political, and globalization reset by then. Make in India will make a major comeback, as described here. Hopefully, the start-up ecosystem shall grow constructively from there on,

1. Venture capital firms – they would get away from FOMO and focus on business fundamentals.

a. No over funding or over-valuations – funding will be split more into phases and milestones driven deliveries with traction.

b. Unit economic will matterBurning cash to beat the competition may not happen again – Grofers vs Big Basket, Zomato vs Swiggy, Flipkart versus Snapdeal, these kinds of fund raises to beat the competition, shall not happen in a more rational sustainable start-up ecosystem. Focus on every las transaction profitability.

c. Emphasis on Bottom Line along with Top Line – Investors will look at bottom line more than top line now (i.e. profits will matter, not just revenues at any cost)

2. Start-ups

a. Improved Focus Start-ups will be able to raise less, and hence they will not diversify / digress into every possible opportunity, but focus on hand full of core business tasks.

b. Reduce costs – Covid19 times will teach everyone how to reduce costs, go more digital / virtual (enable work from home) and be more efficient without even fancy and expensive office for everyone.

c. Profitability – This shall become number 1 mantra of all start-ups, and will make them act like sustainable businesses

3. Government

After covid-19, several existing large businesses are likely to shut down. And the world will likely go more digital, that can benefit start-up ecosystem. Government shall start appreciating start-ups for providing digital future, employment and economic growth. Government policies may be improved in depth, to help start-ups genuinely.

4. Customers and customer behaviour

Customers shall become more value conscious than discount seeking. Customers will pay for deliveries, convenience, and any problems the start-ups are solving. This shall lead to better ready market business opportunities for start-ups if their value proposition and price points are acceptable.

So, it may get worse in 2020 for start-ups, before it gets better in 2022 or so. Tighten your seat-belts and enjoy the challenging ride. You will surely learn a lot as an entrepreneur in these times.

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