A VC guide on how startups can survive the coronavirus business freeze

The novel coronavirus pandemic has brought the world to its knees. Businesses are crippled, industries are seeking bailouts, economies are in distress, and SMEs and startups too have not been spared.

As businesses across the world scramble to assess the damage and how best to lessen the impact of COVID-19 on their operations, for the startup world, the implications are even more severe.

In such an environment, YourStory spoke to a cross-section of venture capitalists (VCs) to find out their advice to portfolio investee companies or startups hoping to put this crisis behind them successfully.

Ganesh Rengaswamy, Co-founding Partner, Quona Capital, advocates having a contingency plan in place.

He says, “The most important thing is that we need a Plan B, and in some cases, there is also a Plan C needed. Companies need a plan to manage growth expectations, capital expenditure, and rationalise certain product lines. I don’t think the back-up plans need to be activated yet, but it is important to be ready.”

Closer look at fundamentals

Coronavirus has underscored the need for business continuity plans though it is difficult in the current environment where every activity cannot be done remotely.

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Rutvik Doshi, managing partner, Inventus (India) Advisors, says, “Founders have started to think of Plan A, B, or C to ensure business continuity as many of them are not geared to work remotely.”

However, the more important aspect which has come out through this situation is a deeper look at the fundamentals of any startup. This is the time to question everything.

Siddarth Pai, Founding Partner, 3one4 Capital, says, “The course correction is very clear: cut down costs or burn, reduce marketing spends, freeze on hiring. In short, startups need to figure how to keep their lights on.”

Given the ambiguity surrounding capital flow and revenue streams at the moment, startups need to pay attention to managing their expenses.

As one investor on the cost structure of startups says, “After employee expenses and marketing spend, the biggest cost for them is office space.” This time has proved to be a great exercise in figuring out the viability of remote working for young companies.

V Balakrishnan, Chairman, Exfinity Ventures, says, “With revenues impacted, startups that have cash and control costs will remain strong. Today it is more a case of survival rather than a case of growth.”

Stretch every rupee

The current situation is similar to the global financial crisis of 2008 when there was a sudden economic freeze and consumer spending plummeted.

Situations like these would naturally have a deeper impact on B2C startups as they directly provide their services or goods to end customers. “Such startups will have to stretch every rupee or dollar,” says an investor.

The B2C startups also deploy large amounts of funds as discounts to attract customers onto their site. This would not be a viable option in the current economic scenario.

On the other hand, B2B startups may not be that deeply impacted as they are generally considered to be more capital-efficient and do not require large amount of investments. Also, when compared to B2C firms, there will be a lag in the impact on these startups.

Sanjay Swamy, Managing Partner, Prime Venture Partners, says, “Since the impact of the current slowdown can be seen across 2-4 quarters, discretionary (marketing) expenses should be evaluated. It is important to first gauge if the customer is in the right frame of mind to buy your product or service. Money should be used more prudently in these times and I advise all startups to plan to get to break-even with the money they already have.”

According to Pranjal Kumar, CFO, Bertelsmann India Investments, it is ensuring the business continuity plan at its portfolio businesses so that they do not lose any momentum.

“Our suggestion to the portfolio is that they protect their base offering, conserve cash, and focus only on those initiatives that will give them robust growth and help regain momentum post these 2-3 months of slowdown. Keep moonshot initiatives on hold currently,” he adds.

Questions of valuation

This is also the time when there is a lot of recalibration expected in terms of valuations of startups and the infusion of funds in the ecosystem. As an industry observer points out, “VCs are the first ones to have a wait-and-watch attitude, and a smart investor will know when the valuation is going down.”

Many believe that the valuations in the Indian startup ecosystem have overheated and there is a need for course correction.

However, this period would also separate the weak from the strong. Sanjay says, “The good thing is that the best and most prudent businesses will be built now. Valuations will take a hit, round sizes will go down, and expectations will temper with a new normal emerging.”

All these events are naturally going to contribute to tepid funding activity for startups. CB Insights in its note on seed stage funding stated that the decline in seed funding in Q1’20 is projected to be starker in Asia, where seed funding is expected to fall 37 percent when compared to Q4’19.

However, it also noted that despite the overall slowdown in Asia, some investors have been bucking the trend particularly in India. “In Q1’20, Sequoia Capital India has backed several seed rounds to India-based startups including FamPay, LeapFinance, and Airmeet.”

The bottom line is this period of slowdown gives young startups the opportunity to do some serious introspection and reflect upon their plans for the future.

As Sanjay says, “It takes seven to 10 years to build a strong business, and somewhere, something will go wrong along the way. Companies should leverage this opportunity to also look inwards and sharpen their tools – from fixing design issues to a host of other internal processing.”

He cautions that only startups that are not built on frivolous spending money will survive.

(Edited by Evelyn Ratnakumar)