Like most businesses around the world, start-ups are encountering challenging times as the coronavirus hurts business sentiment and dries up funding. Small- and medium-sized businesses have been more adversely affected in most places, but large corporations have also started slashing jobs.
Entrepreneurs currently trying to build their businesses have to understand how the pandemic is going to shift user behavior in the future and adapt, Rajan Anandan, a managing director at Sequoia Capital India, told CNBC.
He oversees the venture firm’s Surge program which provides seed capital of up to $2 million and community access to selected start-ups in Southeast Asia and India.
In the first quarter of the year, as infection cases around the world began ticking up, there was an overall decline in fundraising activities, data from CB Insights and Crunchbase showed. The data points to worse times ahead as the current quarter could see a more pronounced slowdown.
Currently, there are more than 5 million people worldwide who have been infected by Covid-19, the respiratory disease caused by the coronavirus. The pandemic has pushed the global economy into a downturn as most governments clamped down on business activities to contain the virus.
For start-up founders, the immediate priority is to ensure there is sufficient “runway” — the amount of time they have before their businesses run out of cash, said Anandan.
“Once you have adequate runway, focus on reimagining your business. If you’re in a sector that’s been deeply impacted, you may consider … pivoting to an entirely different segment,” Anandan said. He explained start-ups may also need to revamp the way they sell, where they spend their marketing dollars and where they can find new customers.
“Try to understand how the consumer and buying behaviour is likely to change in light of COVID-19 and align your strategies in line with what the likely new scenario is going to be,” Anandan said by email. “If you have runway, then this is also the time to build – to set yourself apart from your competition.”
Hemanth Mohapatra, a partner at venture capital firm Lightspeed India, said that start-ups currently raising funds need to close their rounds as soon as they can.
“Our advice to founders is to close their rounds as quickly as possible, not to wait on multiple term sheets, not to wait on the best possible terms they can possibly get, not to shop around and just close the round quickly,” he told CNBC’s “Street Signs” last Thursday. He added that in the current climate, valuations for start-ups will likely fall, but he predicted the market will bounce back faster than expected.
While the pandemic derailed several sectors including travel and tourism this year, other areas — such as e-commerce, digital payments, remote work, online learning, and health-care technologies — have seen a positive impact.
Vinod Nair, an angel investor in early-stage start-ups, told CNBC the ongoing crisis has led to two types of changes in behavior: First, a tactical shift in consumption habits that is expected to last up to two years. Secondly, there are some structural changes taking place — like more people will probably be working from home even after the pandemic is over, according to Nair.
“I look for (investment) themes where there is either a structural change or where a change that was already anticipated has just got accelerated a lot,” he said.
For example, the use of online marketplaces, digital payments and electronic health services — from online workout classes to consulting with doctors over the internet — will likely increase, he said.
Sequoia India’s Anandan said that alongside changing consumer behavior, the pandemic has accelerated the pace of digitalization. In India, that is evident in the kind of growth seen in areas like education technologies and digital health, he pointed out.
“The number of online learners in education has doubled over the past two months. Telemedicine, which was virtually non-existent in India months ago, is now growing at an exponential rate,” he said.
Lightspeed India’s Mohapatra pointed to a silver lining amid the challenging business environment at the moment.
“Having been through multiple crises — back in late-90s and also in 2008 — we have seen the best companies and the best founders come out of these crises,” he said. “We think calamity leads to creativity.”