Indian Start-up ecosystem is certainly a pitstop which cannot be overlooked upon. Driven by factors primarily massive technological upgradation and increase in domestic demand, Start-ups have really taken off. In India there is a projection of around 11,000 startups in 2020 up from 3000 in 2014. Expectations are held high in 2020 as in 2019 a total of USD 14.2Bn was raised cumulatively from the startups. However, Covid has posed a massive challenge in this direction. Thereby, seed funding which is the primary step for raising capital for startups has declined 22% Q-O-Q (Source: Insight success).
As per the survey conducted by National Association of Software and Service Companies (NASSCOM) (Source: NASSCOM- April 2020 Report) over 250 startups, around 90% have seen a decline in revenue. Around 1/3rd of these startups say that they don’t see any growth in business development. This has resulted as a block in funding the future prospects to these startups. Sectors that have taken severe hit are primarily travel, logistics, fintech related etc., There are, however, some green shoots. Healthtech, edu-tech startups have utilised the opportunity well and fare far better in the markets expecting quite a revenue growth. Moreover, at this conjecture, it is necessary for the government intervention to uplift the morale of these startups. This will help them by providing better access to working capital, easy compliance and fiscal policy support, which is the need of the hour.
Considering the above facts, one could easily visualize that pandemic is hitting the valuations very hard. Private equity players have remained cautious and have used ‘wait and watch’ approach until they find certain stability for these startups. However, markets had been bearish for a while, which raised alarm for potential investors who were holding cash. Investors have been trying to leverage on the sharp drop in valuations to seek a higher return on equity in the future. Pandemic has also made larger corporates merging and acquiring startups and other subsidiaries to leverage lower valuations of these companies and sustain the cash flow nitty gritties.
According to me, negotiations and transactions are going to remain but at a much slower pace. Parties interesting in funding startups would like to consider all the risk in light to the present pandemic. Start-up ecosystem would receive a further boost once things get stabilised and fund flow will start returning. Govt of India’s imposition of ban on Chinese companies would certainly impact investment in startups thereby probably creating lower demand and lower valuation of these startups. A silver lining amidst all these is that a greatest recession has led to greatest innovations. I am quite confident that this Pandemic will boost the start-up ecosystem in India much further.