COVID-19 Impact on Economy: Will Start-ups Sink or Adapt?

Start-up models that are fully digital will see lower impact since their ability to provide services is not hampered

In 2020 we are once again facing a major economic recession that tests market’s capacity and check if new and innovative start-ups would sustain or not.

(Photo Courtesy: iStock)

In 2008-2009, when the recession had hit the market, many successful global start-ups like Uber, WhatsApp, Flipkart, and Airbnb found their ways to begin and establish themselves in the market.

Great companies like Microsoft (during the 1973 crisis), Google (1999), Salesforce (1999), PayPal (1998) have been through recessions early in their lifecycles. Other fintech start-ups found their roots in the previous financial crises as well. These include Square (2009), Kickstarter (2009), Credit Karma (2007), Wealthfront and Betterment (2008).

One binding thread that runs through all of these start-ups and has kept them going was a model that created differentiation in the market and understood the demands of the population to beat the crisis (through market orientation). In 2020, we are once again facing a major economic recession that tests markets’ capacity and innovative start-ups’ ability to sustain themselves.

Unlike the traditional SME and mid-sized corporate businesses, which have taken massive hits and seen immense destruction of output, the start-up space will see mixed results (however, we will see the outcomes only in a couple of months). The outcomes for start-ups will be based on a few important criteria.

1. Type of Business Model to Render Services

Models that are fully digital will see significantly lower impact since their ability to render services is not encumbered. In the longer term, once economic volumes are back to pre-crisis levels, we will see some shift towards the online space.

Currently, according to GIPSI research, there already been a 40 percent increase in WhatsApp usage, 313 percent increase in interest for online meetings on Google trends and an increase of 32 percent in the use of online grocery platforms.

On the other hand, models that are predominantly physical will face maximum damage.

2. Type of Spendings

Spendings are divided into essentials, like food, medicines, etc. 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.

This is also due to the fact that the purchasing power of the market has reduced. Disposable income has lowered, and this will also result in lower demand for these services, even after the lockdown ends.

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.

3. Economics

Funding markets are going to be weak for the next six to nine months. Start-ups that need urgent funding will face the challenge of survival. Others who have positive, profitable economics will capture market share. Companies with strong tech infrastructure have a strategic advantage over traditional business models.

The days of running cashback to acquire customers may not be possible in an economy with weak funding outlook.

4. Unique Factors

Certain unique factors like credit risk, regulatory forbearance, etc, may significantly affect businesses that have been factored in our view of the overall impact.

In the above table, we have identified the most-funded verticals in the start-up space in India and have rated them green, orange, and red based on our view of the sector.

Start-ups in some other sectors are witnessing a sharp increase in business. For example, companies providing Video Conferencing services have been experiencing a huge increase in the registration of new users, Gipsi, the Insights Division of Tonic Worldwide found out. Other online services, such as gaming, streaming, and online education content providers are also all experiencing an increase in new users and the time spent on their platforms. Whereas, start-ups in the non-essential and dining out space in the e-commerce universe are significantly impacted.

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.

One would expect that they would be able to resume services as usual once the lockdown opens up. However, we expect the government to identify districts that are hotspots and those areas (primarily large consumption centres like Mumbai and Delhi) may still see an inability to reinstate supplies. For all non-essential goods, the government has issued orders to ban e-commerce firms restarting delivery.

Due to the travel restrictions implemented by many countries, the travel and tourism sector has suffered extensively in all parts of the world.

Also, sports and outdoor events are in moratorium in the near future and so we will see a near complete demand destruction for start-ups in the travel and booking space.

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.

Fintech’s should have a greater increase in NPAs given a lower credit profile of customers. Meanwhile, insurance start-ups are seeing a sharp increase in demand on the health side as some start-ups have begun offering products addressing COVID-19 risks. Large start-ups have seen a drop of 40 percent in transaction volumes due to lower e-commerce and travel bans.

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; Italy and South Africa have already seen an increase in online payments, according to Medici Report.

Wealth management start-ups are expected to see a decline in business as market volatility and fall in indices have reduced investable surpluses. During periods of instability, people predictably prefer to avoid investing and wait for the situation to improve.

On the funding side, start-ups will find it difficult to raise capital as the money that venture capitalists invest in start-ups comes partially from public markets. The pullback in markets will have a knock-on effect on VCs funding. There will be a plethora of deals seen by VCs and they will demand better thresholds from start-ups. This means that the investors will wish to see more proof of traction with customers, a more compelling story, and a greater differentiation from the rest of the market.

That being said, a few years from now we may see some new unicorns since start-ups will create unique business models for the changing environment.

(Aparajit Bhandarkar is a partner at Varanium Venture Fund. He has previously been the Head of Strategy at Jio Payments Bank. This is a personal blog and the views expressed are the authors’ own. The Quint neither endorses nor is responsible for them.)