How Coronavirus Is Affecting the Startups and Fundraising Activity?

Coronavirus has reached around 192 countries across the world and most affected countries are in lockdown for weeks. Businesses are operating through work from home as per the governments' guidelines. But is this good for the economy? How work from the home situation will affect start-ups and funding? Amid this pandemic, all types of businesses, be it start-ups or established ones, are facing challenges. Even tech tycoon Bill Gates has warned that the virus could lead to global economic depression.

Once the world realized that the effects of COVID-19 are going to last for a long time, people began to scramble for the plan-B. Sequoia Capital, one of the most respected names in the venture capital industry around issued a Black Swan advisory to its portfolio companies, asking them to conserve cash and cut spends. The company has put out a white paper on how COVID-19 would impact the ecosystem.

In a memo to founders and CEOs, Sequoia equated coronavirus with the "black swan of 2020", stating it could have far-reaching implications. Its guideline to startups was simple: question every assumption, be it the business, cash runaway, fundraising, sales forecast, marketing, headcount, capital funding, the list goes on.

Surely, the world of investments is coping with COVID-19 uncertainty. It may seem like early days, but anxiety is palpable among venture capitalists (VCs), entrepreneurs, and startups over what the future may bring, post-coronavirus. The startup ecosystem in India seems to have moved into the zone of "status quo" as far as investments are concerned. Pranjal Kumar, CFO, Bertelsmann India Investments, says, "It (COVID-19) started to hit home in mid-February. So, there is uncertainty and no one knows what is going to be the outcome."

Situation Across India

As noted by Business Standard, Sreejith Moolayil, co-founder of True Elements, a Pune-based consumer-focused start-up that offers health food, claims he is finding it tough to keep it afloat. The lockdown has gripped the entire state in a bid to stop the rapid spread of coronavirus. "As a start-up, we would be in a big mess because 15-days shutdown means our cash flow for those days is gone, I don't know how I am going to pay salary to my employees. I am not a big-time venture capital-funded company," said Moolayil, whose firm has 115 on its roll.

The example of TheWowBox is also somewhat the same though the start-up faced a slightly different challenge. The Mumbai-based company offers a discovery platform for new consumer products. As part of its promotion initiatives, the firm distributes newly launched products of different companies and also promotes entertainment events. According to its founder and chief executive officer (CEO) Nikunj Bubna, all these have to be completely stopped since consumers are now focusing on buying only essential items.

"Our business has straight gone down to zero. We are having a warehouse where products or samples worth lakhs are on the verge of expiry," said Bubna. "Our fundraising process also got impacted."

Moreover, according to a survey by community platform LocalCircles, early-stage start-ups, funding dependent start-ups and many small businesses will soon be fighting for survival. It revealed that about 71 percent of start-ups and small businesses are facing issues such as lower demand for products and services. This would potentially result in salary cuts and a reduction in expenses towards marketing, advertising, and infrastructure. Many companies have asked their employees to work from home and others have temporarily suspended operations.

"The survey accurately captures what start-ups and SMEs are currently faced with and soon LocalCircles will aggregate and make recommendations to the government on relief measures needed for the start-up and the SME sector," said Sachin Taparia, founder and chairman of LocalCircles.

According to experts, start-ups have begun conserving cash irrespective of their size. Any kind of investment that was in the pipeline, including hiring and new projects, have been curtailed. "Most vulnerable are the start-ups which were running out of cash and have not been able to raise funds. As the scenario has slowed down, they could be under risk," said Anup Jain, managing partner at Orios Venture Partners.

What Experts Have to Say About Start-ups and Global Funding Scenario Amid Pandemic?

Emma Cartmell, an angel investor and founder of Cartmell LLC said, "I think it is a mixed bag depending on the type of investor: Strategic investors (providers venture capital funds) are going to slow down because COVID-19 will require all hands on deck, and so many of the staff that generally are involved in the diligence process will be reallocated to deal with COVID-19-related issues, so they won't be able to do diligence at the same pace they are used to. Conversely, many traditional VCs are sitting on a lot of dry powder, and I think they'll continue business as usual in 2020. But I do think we'll see the slowdown in preceding years. Also, with the reduction in funders, I think that VCs will negotiate harder and look to get better deals."

According to Halle Tecco, founder of Rock Health and CEO of Natalist, "Today VCs are investing from a pool of money they raised yesterday. They may be more cautious about the business ideas they back (and if those companies can likely withstand a downturn), but I don't think we'll see any drastic decrease in funding this year."

Julie Yoo, a general partner at Andreessen Horowitz and co-founder of Kyruus, said that companies with a B2B go-to-market strategy need a mitigation plan, as decision-making around purchases may be deprioritized. "I think that is something that is going to force the conversation around how strong is the value proposition that you have. And what makes this mission-critical versus something that is nice to have. That is a key question that we've been working with our portfolio companies on asking."

Jeffrey Ries, managing director at Healthbox said, "I think probably in the short run, deal flow will slow and I think we'll see it really start with some of the more strategic investors; the health plans, the health systems, the pharma companies making investments in digital health. The reason for that in my mind is because their intention is likely going to shift to what is going on around coronavirus and it's not because they don't think it's important or at least in the short run don't have the capital to make investments. I just think once senior leaders need to get brought in [they] will get distracted."

Positive Outlook

When asked if such a situation will stop VCs investing, Ophelia Brown, a partner at venture capital firm Blossom Capital said, "Definitely not!… We just signed [a term sheet] last week and expect the next one is imminent."

Evgenia Plotnikova, partner at Dawn Capital said: "We are open for business." Moreover, she added that Dawn's portfolio companies have raised close to US$200 million in recent weeks.

Matthew Stafford, an angel investor in the UK, says he's "carrying on as normal for now". He has just invested in one company (for the third time) and is beginning due diligence on another.