How the pandemic has helped start-ups come of age faster

In July this year, the Federation of Indian Chambers of Commerce and Industry (FICCI) said that nearly 12% of start-ups had shut down and over a third were struggling to raise their next round of money. By November, this situation had improved considerably . Early-stage funding, in particular, moved back to normal (up from $175 million in Q2 to $320 million in Q3).

Yet, through this, investors and founders of start-ups look at a very different landscape from what they saw last year and are responding with their usual agility. Given that start-ups infuse greater competition and create jobs, it is imperative to understand these changes.

Critically, the uncertainty about the shape of the recovery (V, L, K-shaped) has forced investors to place a greater premium on experience and stability in these young companies. They have demonstrated an understandable reduction in risk appetite and a desire to fund strong teams which have some critical mass of business. Organisations which had raised more money in the past have found it easier to be funded. All this means that we may see the emergence of a few players of scale across sectors. Given that larger companies have a material impact on job creation, one cannot overstate the importance of a climate that facilitates such scale.

The Covid-19 pandemic also raised the level of management muscle across the start-up ecosystem. Faced with revenue shortfalls during the lockdown, most new companies have been forced to push through operating efficiencies that are usually seen in companies which face the scrutiny of public markets.

These included the unfortunate reality of layoffs, although some of the jobs are now back. A few chose to scale down office space. Many dramatically reduced the spends on acquiring customers, always a major cost item for such companies, and found ways to make money from existing customers.

Over six months, hundreds of these relatively young companies achieved improvements in cash flows which might earlier have taken several years. Going forward, the bar for performance expectations from managements is now set higher.

The pandemic has brought to the surface real needs which customers will pay for, as distinct from anticipated needs, which need market creation through some form of discounting. Venture investors are now more choosy about the sectors and business models they will finance.

In this, they are helped by customers who are articulating more clearly about the products they care about. They want health care services cheap and fast. They need someone to deliver goods from point to point efficiently; so surface transport company Rivigo received $11 million in October. Small businesses need smoother finance to stay afloat when consumption is lower than normal. Therefore, invoice discounter Credable and supply chain fintech Livfin are among the notables who have received funding recently. Everyone needs entertainment and education. The case of learning company Byjus which raised $200 million recently is well known.

Interestingly, the existential challenges posed by this crisis have manifested in an interest in sustainable businesses. Writing in the Harvard Business Review in 1994, Peter Drucker exhorted companies to change the "theory of their business" when the facts of the world around them change. Venture investors are smartly using this opportunity to bring in the behaviours which will result in value accretion. They have enabled individuals to decide whether they want to be employees of large organisations or pursue the entrepreneurship route. It has forced customers to decide between flaky services and those that they really care about. Investors now have a better sense of the efficiencies possible when managements are pushed to the wall. Critically, the year has created a cadre of managers who weathered their first real business downturn and came up trumps. As the country moves to become a $5 trillion economy, all of this can only be to the good.

Govind Sankaranarayanan, former COO and CFO at Tata Capital, is currently CEO at ECube Climate Finance.