The Impact of Covid-19 on Indian Start-ups

India has significantly improved its ranking in the ease of doing business in recent years. In 2020, India was ranked 63rd amongst 190 economies participating in the process, up from 142nd in 2014. India’s start-up ecosystem was performing brilliantly well regarding funding, deals, and valuations until the COVID-19 pandemic emerged at the beginning of 2020. The frequent lockdowns, future uncertainties, and rapid digitization caused the Indian start-up ecosystem setbacks. This blog will discuss some of the challenges faced by Indian start-ups as a result of COVID-19.

Challenge 1: Funding

One of the significant challenges faced by start-ups is funding. About 59% of Indian startups and MSMEs may shut shop, sell off or scale down, and about 28% identified raising finance as one of their most prominent issues. Despite the COVID-19 pandemic, Indian start-ups have shown resilience and attracted vast funding. Although funding in 2021 was lower than the previous year, it was significantly higher than in 2016 and 2017.

There are many reasons for achieving this feat since 2016, one of the main ones being rapid digitization. Many start-ups now focus on providing technology-driven solutions in education, finance, or consumer-driven sectors. This makes Indian start-ups better placed than traditional industries that operate on a conventional set-up, making them less resilient and more vulnerable to the consequences of lockdowns. The shift from the unorganised to the organised sector has further added to the woes of the traditional industries.

Another factor that allowed Indian start-ups to thrive during the pandemic is the amount of liquidity available in the system. Due to falling interest rates, many investors have surplus cash, which they are willing to invest in futuristic businesses. This has contributed to the skyrocketing valuations of start-ups. Start-ups like Razorpay (payment solutions), Zerodha (broking), Unacademy (edtech), and Nykaa (fashion) have achieved unicorn status this year despite the pandemic.

The government regulations and policies have been favorable towards the start-up ecosystem. Measures announced by the Indian government during the Covid-19 pandemic include:

1. The Covid-19 Start-up Assistance Scheme (“CSAS”) has been launched by the Small Industries Development Bank of India (“SIDBI”). It aims to support the start-ups from the impact of Covid-19 and provide them with financial assistance.

2. Micro, Medium, and Small Enterprises (“MSME”) can take loans at a concessional interest rate of 5 percentage under SIDBI assistance to facilitate emergency response against Covid-19 (“SAFE”) scheme. Under this scheme, the loan will be collateral-free and disbursed within 48 hours with the minor hassles to the MSME’s engaged in manufacturing products and services related to fighting Covid-19.

3. The Ministry of Corporate Affairs (“MCA”) has launched an integrated form SPICEe+ to incorporate companies. The combined form will save time and costs for starting new businesses and improve India’s ease of doing business rankings.

4. The Ministry of Finance has extended certain tax benefits to eligible businesses by amending section 80-IAC of the Income-tax Act.

Challenge 2: Cash flow issues specific to certain start-ups

The next concern for the start-ups during the Covid-19 pandemic is cash flow issues. According to Business Standard, only 31% of the start-ups have cash reserves to sustain them for more than three months. Steady cash flow is essential to resolve working capital, liquidity-related problems and finance a start-up’s growth. To mitigate cash flow issues, start-ups have undertaken several measures like reducing advertising expenditures and employee compensation. Some start-ups have dropped their further hiring plans and even laid off their current employees. Some sectors like aviation, travel, and hospitality are more prone to having these issues and might need additional external support.

According to the same source, only 22% of small firms can foresee future growth, and 59% are expected to shut down or scale their operations. To help start-ups under threat, some start-ups argue that the taxation policy should be made more lenient. The government should provide some external support to the start-ups operating in sectors that are more prone to the effects of the pandemic. This support may be in the form of tax benefits or a concessional loan scheme. Creating employment opportunities, removing duplication of compliances, and relaxing licensing schemes are ways the government can make a start-up friendly environment.

Challenge 3: Geopolitical Issues

Apart from the financial assistance and flow of capital, other elements have disturbed the ability of start-ups to flourish, such as geopolitical issues and human resources. Many Indian start-ups like Zomato, BigBasket, and Paytm have Chinese shareholders. And the relationship between India and China is widely considered to be changeable. India started to ban some websites and mobile applications from China and modified legislation to curb Chinese investment. Due to the military standoff between China and India, start-ups have also been hurdles trying to raise funds.

Challenge 4: Lack of Workforce

Another major issue is the lack of workforce, in the case of workers unable to return to work. It is said about 78% MSMEs and startups in India reduced workforce in last 8 months And insufficient capacity of workers results in the ineffective running of the company. Furthermore, the Labor Force Participation Rate (LFPR) in India appears to have slid even further during the COVID-19 pandemic. The need to attract new hires is challenging for start-ups because of their limited funds. Although such situation is being recovered, this issue might significantly hinder the growth of start-ups.

Conclusion

The gradual lifting of lockdown restrictions will allow the movement of people and goods across the world and the functioning of every other industry as they are part of the supply chain. But lifting the lockdown is not a straightforward process. Instead, bringing up changes in business models might help the start-ups for their growth. The use of IT has become prominent during the pandemic. Thus, start-ups can integrate technology into their distribution processes. This innovation would help secure the ability for start-ups to persevere and navigate the pandemic.

This article was written by Manas Maheshwari and Vinesha Ambur Muralidhar who were participating in qLegal as part of their Law Masters studies at Queen Mary, University of London.

qLegal provides pro bono legal advice to start-ups and entrepreneurs on intellectual property, data protection, corporate and commercial law. See the qLegal website for more details and to book your appointment now.

Follow us on Twitter and LinkedIn for regular updates on issues relevant to your business.