Covid-19 shatters start-ups’ dream. Government urged to come up with a burden sharing plan

“The global pandemic has altered the human and enterprises’ behavior – working from home, no business travel domestic or international, enterprise buyers freezing the budgets, compensation pattern shifts for employees, consumers spending only on essentials such as – groceries, food, medicines, no appetite for novelty items or fashion and no new capital investments from global markets. This shift in human behavior can lead to start-ups going bankrupt or forcing start-ups to cut down jobs to stay afloat,” expresses Maruthi Medisetti, CEO & Co-founder, Metro Medi.

This is the voice of just one start-up company bearing the brunt of the lockdown caused by the pandemic outbreak of Coronavirus causing the infectious pulmonary disease – Covid-19. This situation has only accentuated the grievances of start-ups leaving them to find small mercies in this tormented state of affairs. The market situation before the Covid-19 was already rough and finding funding for many was such an ordeal. Now with these funding taps further running dry, thanks to Covid-19, start-up founders have to face the daily challenges and pull up their sleeve to keep their employees safe, getting them paid on time and exploring collaborative business models to stay afloat.

“It is a very tough time, and it is equally tough for all businesses. Start-ups have always known to work with very limited resources. With start-ups at different levels from unicorns to ones born last week everyone has a different set of challenges. Sumeet Verma, CEO & Co-founder, KopyKitab. Verma says the challenge is especially heavy for the young, less funded and bootstrapped ones, everything is very limited, from manpower to financial resources.

Grievances Galore

Hersh Shah, GLECO, Institute of Risk Management (UK) India Affiliate, shared a very valid concern. Shah says, “We heard some instances of term sheets of startups being canceled by investors globally due to the underlying uncertainty of the pandemic. I can only imagine the plight of the founders of such startups and the potential impact in the value chain. Job offers would have been released, procurement would have been committed, digital partners would have been empanelled. Startups in their initial years don’t have reserves and need the cash flow to survive. Many startups don’t have business continuity and risk management plans in place.”

Bhaskar Majumdar, Managing Partner, Unicorn India Ventures, says, “Both B2B and B2C start-ups will experience lower customer spending. Reduced top-line leads to higher cash burn will limit the cash runway. Since VCs invest on medium- and long-term potential, funding rounds will slow down forcing startups to reduce their burn to stay alive. With limited cash runway and tough milestones to hit, most startups can't afford to shut down for foreseeable future. Startups will be forced to cut staff and refocus on core performing business areas. Valuations usually drop and funding rounds will take longer to close making it a buyers’ market. Only companies with strong fundamental business models who can weather the storm will survive.”

Large enterprises with disaster management or with an organized contingency plan may escape this brunt. But for a start-up laying down a business plan itself is a challenge. Taking an entire start-up company remote is a very difficult task, as they rely on the free flow of information. People are unsure of protocol and where to get the required information. Investors will now triage their deals worrying about the liquidity of the companies with the highest valuation, which typically have the highest burn rates.

Naman Shah, Founder of e-commerce platform, NowPurchase says that the government must bring in more solutions to tide over the phase after the lockdown period too. “As an e-commerce platform that deals with suppliers/manufacturers of industrial goods, the lockdown has directly impacted us. In the end, we are all here to do business and grow. We are not making any money, and are responsible to pay our employees. Some of us (start-ups) may have a back-up of 2-3 months, but how long can you really sustain without revenue. From the government end, there only has been an extension in GST filing dates to July 31st. One month of lockdown will not solve anything, and the impact of this virus could last for an entire year or more.”

If the lockdown impact on start-ups will last for a year, how are these young companies incepted in 2019 or even 2020 survive the battle? Will they be wiped out even before the prototype stage? But the devastative impact of Covid-19 does not seem to spare start-up of any age. Let’s take an events start-up founder’s view on this. Fawaz Syed, co-Founder and Director, Digital Jalebi, “Events make up approximately 40-50 % of the revenue of Digital Jalebi. Due to the Coronavirus outbreak, the events industry is the most affected (apart from tourism and aviation). Most of the event management companies I know are facing very tough times. Since we are into the services sector, maintaining cash flow is very critical to maintaining our employees and other expenses. Another major factor is the past projects which have been delivered, the payment of past projects is held up because of the lockdown. The finance departments of the companies are shut down due to which the payments are held up. And it has been estimated that post-corona crisis, it will take at least 12-18 months for the industry to recover.”

This means we are coming back to the fact that survival of such start-ups is going to be a big question and that would mean job losses for a many or pay cuts for a many.

So, how can the government intervene with relief measures?

When the lockdown period in India ends, the start-up environment will have a different color. It will be a mighty challenge posed to every start-up entrepreneur to stay afloat, pay its able aids in business and pay GST.

On March 24^th, Finance Minister Nirmala Sitharaman did announce several important relief measures taken by the Government of India in view of the Covid-19 outbreak, especially on statutory and regulatory compliance matters related to several sectors. She did announce the much-needed relief measures in areas of Income Tax, GST, Customs & Central Excise, Corporate Affairs, Insolvency & Bankruptcy Code (IBC) Fisheries, Banking Sector, and Commerce. But how much of these relief measures will help a start-up company in distress due in times of this pandemic? With complex systems around, it is going to be the expectation from the Government to pull them out of deep waters. There is nothing but a want by the start-ups for the startups to share the burden until there is stability in the global economy. 

The Burden Sharing Plan 

“The government should step in and take some measures immediately to give confidence to the start-ups. These measures could be: a) Relax the tax filings and tax brackets for people with lower salary band; b) Announce a financial stimulus to give 6-months runway to the companies so that they can figure out their lemonade idea or pivot to a new business model,” suggests Maruthi Medisetti, CEO & Co-founder, Metro Medi.

Hersh Shah – CEO at Institute of Risk Management says that the Government, under the Start-up India initiative, should release some guidelines for the protection of start-ups and investors in such force majeure situations. Investors should also evaluate risk and business continuity frameworks prior to investment, to avoid any surprises.

Mohammed Iqbal, Founder at WaterScience, who has closed his manufacturing facility, opines that the first thing the government must do is to contain the COVID-19 pandemic. Any other step will work only when this is done. “Once we are out of the woods of the pandemic, the government has to give extensions and support in the form of tax breaks, to stimulate the economy. Receivables will be affected for all small businesses and some extra time will be needed to recover.”

Finding some relief with the measures by the government, Agnelorajesh Athaide – a Serial & Social Entrepreneur, Real Estate Developer, Global Citizen, Educationist, Angel Investor, Motivational Speaker, Chief Mentor & Business Strategist, indicates that even as India focuses on handling the health crisis, one of the world’s largest economy is already feeling the impact of total lockdown. Apart from the temporary loss of revenue, the impending recession, fears of slow market recovery, have been primary concerns. However, the recent tax relaxation and extension of the financial year by the FM, along with other initiatives, has brought some hope with lot more expectations in pipeline like loan repayment deferment with no interest and special fund disbursements in times of need to sustain and survive.”

Bhaskar Majumdar, Managing Partner, Unicorn India Ventures believes that with the limited cash runway and tough milestones to hit, most start-ups can't afford to shut down for foreseeable future. Although some sectors like Travel and Hospitality are directly hit, the ripple effect is felt across all sectors. Very few sectors, like doctors-on-demand or medical supplies, experience any benefit but that is limited due to overall downward pressure. Taking the entire company remotely is a very difficult task, especially for start-ups, as they rely on the free flow of information. People are unsure of protocol and where to get the required information. The corrective measures would be for start-ups to limit burn and preserve the cash they've raised to weather the disruption. To limit layoffs, some start-ups could consider slashing management salaries or even a uniform salary cut across the organization four day works weeks that would save 20% salary costs.”

he collective opinion from start-up founders’ centers around the government’s intervention in three ways. One, in sectors where the government is the consumer i.e. B2G, they can ensure that tenders are honored and payments made. Second, tax rate (GST, direct taxes, etc) can be relaxed especially for sectors heavily impacted by slowdown, and lastly, the government could cover partial payroll expenses for startups that don't cut staff. Denmark, for example, is covering 75% of salaries for companies that do not cut staff, while Germany is offering to cover 60% of the new salaries for employees reduced from full to part-time.

Karan Bhangay, Founder of Hand Painted Stories wants the government to help them with tax filing and some support with loans in these difficult times. He expects the government to build a cushion for the start-ups built recently in 2018-2019.

Dr. Saundarya Rajesh, Social Entrepreneur, Founder – President of Avtar Group, says that start-ups and small business units, especially those in the manufacturing segment are reported to be giving pay cuts or even retrenching employees. This happens, typically because start-ups focus on customer aggregation and fundraising initially rather than on generating profits. Also, all those start-ups in travel and transportation are impacted in this nation-wide lockdown period with everyone canceling their vacation plans. Rajesh is in the opinion that even though the Finance Minister has announced a few relief measures by way of extending the tax filing date, and amendments in the GST filing, the government instead of blanket relief measures, must provide assistance to specific industries or sectors that are impacted by COVID-19 crisis that would enable small businesses to tide over this situation.

Since the government is asking start-up companies not to fire employees due to the current crisis, the complete burden is levied upon the employer to maintain the employee's salaries. A collective thought that resonates in this crisis time is that the Government must come with a burden-sharing plan. There is an urgent need for the government to fix a certain salary until the lockdown period is over, with 50% of this salary expenses being borne by the government.

Chairman and Managing Director of Astrum, Manoj Kumar Pansari says that the Government should help lift regulations and make access to capital easier for start-ups and small businesses. On the other hand, Pankit Desai, co-Founder CEO, Sequretek, has few pertinent recommendations. He says, “Most start-ups that are in the business of servicing other enterprises have already or are most likely to come to a standstill. Cashflow will be an issue for these companies. With the funding ecosystem completely dried up, term sheets too are not getting funded. There needs to be some mechanism by which a stimulus is provided to these start-ups in the form of a credit guarantee to get over this short-term crisis. On one hand, is the cash flow issue and another hand there is an expectation that people should still get paid while they are unable to go to work. Where is the cash going to come from to support the business? The invoicing and billing that are being done, start-ups have to fork out TDS and GST upfront, again becomes a cashflow issue. There could be a deferment on GST payment for SMEs. Today, even if you raise an invoice, the market situation is such that the customers will not be in a position to pay, but the GST liability still holds true the moment an invoice is raised. TDS that gets deducted at source, maybe a TDS deduction waiver for 3 months can be a way about putting cash into businesses.”

Innovation – A possible revival strategy

Epidemiologists say that the Coronavirus’ pandemic outbreak will last for several months. As India fights the battle hard, the government just hopes that the country will manage the situation well within the 21-day lockdown period and business in the country will normalize in about 3 months. But these are just hopes! The real situation will unfold soon. As the world rolls back to normalcy, the hardships for start-ups are going to continue for long. Increased resilience, confidence on self and team by start-up entrepreneurs is the need of the hour. Above all innovation in revival strategies is going to be the key in the start-up business.

Yeshasvini Ramaswamy, Founder, Culturelytics, has one valid suggestion here.  She says, “Things are happening at an unprecedented level world over. The whole pandemic has shown the world the need to connected, safe and also educated. Tech is a great connector and if it helps lives being saved at low costs, it could be a game changer. But overall, it will be a wait and watch approach. Startups will have to evolve and adapt. It will be interesting to observe how the start-up businesses innovate and also buffer funding tasks in their business plans for such contingencies. Engaging their customers in innovative ways in these times can make the difference between survival or shutting down for a lot of them.”