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“There’s always an opportunity with crisis. Just as it forces an individual to look inside himself, it forces a company to re-examine its policies and practices,” says Judy Smith, the American attorney, writer, and founder of a crisis management firm. The new-age Indian start-ups are doing exactly that and moving into innovative spheres amidst the long lockdown period.

Indian tech start-ups are in the survival mode and are doing absolutely anything to stay afloat. Several Indian tech start-ups, whose core business has nothing to do with food for example, are trying their luck in essential items to stay in business during the Covid-19 lockdown that has either halted or slowed down most businesses. From online travel agent MakeMyTrip to property portal NoBroker, tech firms are either coming up with new service lines or tying-up with food related businesses.

But first, what is a start-up? A start-up is a young company founded by one or more entrepreneurs to develop a unique product or service and bring it to market. Start-ups are connected in solving problems where the solutions are not obvious and success is not guaranteed. Most of the start-ups begin with initial funding from the founders or their friends and families. According to a pilot survey conducted by RBI between November 2018 and April 2019, more than two-fifths of the funds of start-ups came from family and friends.

According to Tracxn, hotel aggregates formed the top market for investments in 2019, followed by e-commerce logistics, online horizontal B2B marketplace and cab-ride hailing space. After these sectors, online comparison platforms for insurance, electric vehicle charging network and ‘free float two-wheeler rentals’ were the other top areas that received heavy investments.

Some cities tend to become start-ups hubs. India is no different, with majority of the companies being founded in a handful of cities. Delhi NCR, Bengaluru and Mumbai were ranked the top three cities, where the greatest number of young ventures got formed. Bengaluru firms claimed almost half of the total equity funding raised by start-ups in the country, followed by Delhi and Mumbai.

The innovative primacy to specific technical exigency of the start-ups has made them a partner in the ‘Atmanirvar India’ initiative of the government as well. The atomic energy-related reforms initiated by the government recently has intended to link India's robust start-up ecosystem to the nuclear sector. Technology development cum incubation centres are proposed be set up for fostering synergy between research facilities and tech entrepreneurs.

Growth of Indian start-up ecosystem

Since most of the start-ups are tech-driven and India has a vast pool of tech hands, the start-up ecosystem has grown steadily over the past years. At the beginning of 2019, KPMG had released the latest report on the Indian start-up ecosystem. It states that the number of start-ups in the country has gone up from 7,000 in 2008 to 50,000 in 2018. This growth was backed by the explosion in the internet space in the country, better literacy rates and exposure to the knowledge of entrepreneurship beyond the boundaries of the country.

According to the 2020 global technology industry innovation survey of KPMG, India has moved to the second spot and tied with China for innovation, adoption and promotion of new-age technologies such as artificial intelligence (AI), machine learning (ML), blockchain and internet-of-things. India has continued to rise in the Global Innovation Index too – improving its rank from 81 to 52 between 2015 and 2019. This has been bolstered by urbanisation and a younger demographic in the country, along with an increase in venture capital in the last two years.

Another significant development that facilitated the growth of start-ups was the rise in incubators and accelerators which provide mentorship and technical support to start-ups and guide entrepreneurs on how to raise funds and acquire customers. NASSCOM's Indian Tech Start-up Ecosystem 2019 report revealed that the total number of incubators and accelerators in India has increased from over 320 in 2018 to over 335 in 2019.

The start-up landscape in the country is becoming the epitome of innovation, with companies bringing out solutions that are aimed at solving locally relevant issues. However, the start-up ecosystem is concentrated in a few states. Just four states, Karnataka, Maharashtra, Telangana and Delhi accounted for three-fourth of the start-up landscape in the country in 2019.

Start-ups are involved in diverse sectors ranging from agriculture to health. Flipkart, Ola, Paytm, Swiggy, and Freshworks - the brightest stars of the Indian start-up ecosystem - have now become household names, with more start-ups being added to this group in 2019, particularly with the emergence of new unicorns like Delhivery, Bigbasket, Dream11, and Druva to name a few.

With an addition of more than 1,300 start-ups in 2019, India continues to reinforce its position as a leader in the global start-up ecosystem, according to IT industry body NASSCOM. The total number of technology start-ups in the country has grown to 8,900-9300. India also witnessed the addition of seven unicorns last year till August taking the total tally to 24 - the third highest number of unicorns (companies with valuation of over $1 billion in a single country) in the world. Indian start-ups have created an estimated 60,000 direct jobs and 1.3-1.8 lakh indirect jobs, NASSCOM said in a report last year.

The funding of start-ups witnessed an impressive 25 times growth from a tiny $550 million in 2010 to $14.5 billion in 2019. Of the 1,185 funding rounds last year, 459 were Series A and late-stage investments, according to the ‘India Tech Annual Factsheet - 2019’ compiled by data analytics firm Tracxn. This is a significant jump from $10.5 billion raised by young ventures in 2018 and $10.4 billion in 2017. There are 24 ‘unicorns’ or start-ups valued at more than $1 billion each and 155 ‘soonicorns’ or firms which hold the potential to become unicorns in the near future in the country.

The flip side of growth narrative

The country has the third largest number of unicorns in the world and the tech start-ups are expanding to innovative spheres. Yet, the number of new entrants into the ecosystem has been declining since 2016. According to data from Tracxn, a firm that tracks investments and financials of private companies and start-ups, the number of companies founded in 2019 was only 5,462 – 35% down from 2018 – the lowest since 2011. Furthermore, this number has been falling since 2016, the year the government launched the Startup India scheme, an initiative to catalyse and encourage innovation and entrepreneurship in India.

This could be because of the increased competition in the space that has raised the entry barriers for new ventures, which need to sustain and survive alongside more established players with deep pockets. But this dip in the number of players hasn’t affected the money that has gone into the ecosystem. Start-ups across sectors received an overall funding of $20.44 billion in 2019 - the highest in the last five years.

Impact of Covid-19

But the 2019 success did not last long as the global businesses halted following the Covid-19 pandemic in 2020. According to NASSCOM Start-Up Pulse Survey – Q1 2020, Covid-19 is the biggest challenge that India’s nascent tech start-up ecosystem has ever faced. About 30-40% tech start-ups have halted their operation while 70% have runway less than three months. Some 54% looking to pivot to new opportunities and 40% want to diversify into growth verticals like healthcare and EdTech while 50% are enhancing focus on emerging tech like in AI, IoT, Cloud.

As demand came to a standstill during the lockdown, start-up revenues were hit hard, forcing many businesses to either shut down or transform their business models altogether to withstand the crisis. According to the NASSCOM survey, over 90% of start-ups faced revenue declines. The decline in revenues was as steep as over 80% for at least 34% of the start-ups.  For the remaining start-ups, the decline in revenues was feared to be more than 40%.  Travel and transportation start-ups witnessed their revenues decline by more than 40%.

At least 65% of start-ups are facing “significant negative impact” on funding due to the Covid-19 crisis. The early-stage start-ups are affected the most.  “Funding shortage is being felt by most start-ups and can affect long-term sustainability,” NASSCOM analysts wrote in their report. Among sectors, aggrotech and fintech start-ups are the worst hit when it comes to funding, while healthtech is witnessing a more favourable funding environment, the NASSCOM survey found.

Many start-up founders who had earlier prioritised growth over profitability are now forced to re-look at their business strategy as Covid-19 has impacted start-ups and big corporates. In April and May, multiple start-ups laid off or furloughed employees and contract staff in addition to implementing large scale salary cuts. From online food delivery, hospitality and tourism to mobility, social commerce and foodtech, smaller start-ups and well-funded unicorns are downsizing or streamlining operations to cut costs as demand remains muted due to the lockdown.

The sector has witnessed layoffs, hiring freezes, and salary cuts across some major start-ups too ranging from unicorns like OYO, Blackbuck, MakeMyTrip to start-ups such as Limeroad, Fabhotels, and Shuttl.

Nine out of ten start-ups are facing a decline in revenues and about 30-40% indicated that they were temporarily halting operations or in the process of closing down, according to a NASSCOM survey. If no authentic estimates of job loss or revenue loss of the sector are available yet, the magnitude of the number of start-ups reporting revenue loss and indicating closures clearly suggest the huge losses on both counts.

The silver lining

The lockdown has severely crippled half of the ecosystem, especially e-commerce and mobility services. But the other half - digital players in content, social media and so on - is having a good run. Digital services from social media, to online video streaming, e-learning, news, digital payments and e-health are all seeing a boom.

Online education has seen a massive boost since lockdown. Almost every other online platform has opened up its content for free - making it accessible for all students. As many as 14 EdTech start-ups have raised funds since March 2020 as online education saw a massive boom in India. Even in a challenging environment, EdTech is expected to be a hot sector of venture capital (VC) investment, said a KPMG report.

Government initiatives

Recognising the vast potential of the start-ups, the government had launched the Startup India Initiative way back in in 2016 and rolled out several programmes with the objective of supporting entrepreneurs, building a robust start-up ecosystem and transforming India into a country of job creators instead of job seekers.

Startup India is a government flagship initiative to build start-ups and nurture innovation. Through this initiative, the government plans to empower start-up ventures to boost entrepreneurship, economic growth and employment across India.

The 19-point action plan, organised by the Department of Industrial Policy & Promotion (DIPP), focuses both on restricting hindrances and promoting faster growth by way of simplification and hand holding, funding support and incentives and industry-academia partnership and incubation. The government has introduced a number of start-up schemes in the past few years. A `10,000 crore fund is set-up by the government to provide funds to the start-ups as venture capital. The government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital.  New start-ups are also exempted from income tax for three years provided they get a certification from the Inter-Ministerial Board.

Things have, however, changed drastically after Covid-19. Start-ups are fighting a grim battle to survive and their future depends on how the Indian economy will fare in the coming days. British bank Barclays estimated a $234.4-billion economic loss for India last month. The loss will be more, following a prolonged lockdown. Most rating agencies are projecting negative GDP growth for India this year. If so, the start-ups will have to wait to ride a growth trend.