After the tremendous successes of last year, the Indian startup ecosystem had anticipated a second consecutive productive year.
Even 2020 began well. However, everything stood still as we witnessed a rapid spread of coronavirus in India by the mid of March. The declaration of nation-wide lockdown worked as the last nail to the coffin of Indian economic activities.
It took a pandemic to identify major flaws in the Indian Startup Culture
Startups’ Layoff Saga
By the beginning of April, many major startups and unicorns started feeling the heat of a cash crunch. Their businesses were hit severely by the imposition of lockdown. Due to the two-month-long lockdown across the nation, the revenue of these startups has received a major blow. Cab aggregator startups like Ola and Uber reported a decline of almost 95% in their income. This alone destroyed the Startups’ working capital balance.
Leading Indian cab aggregator, Ola, announced that it would lay off 1400 employees even after its senior management had taken salary cuts. Its international counterpart, Uber, also laid-off 3700 people in the mid of May and said it would have to cut the workforce by another 3000 people in June.
The same trend can be seen in food delivery unicorns like Swiggy and Zomato. The pandemic has led to the closure of many restaurants, impacting the businesses of these two emerging companies. As per the initial plan, they may cut their workforce by 25%-40%. Other big names like OYO, Magic Bricks, ZiffyHomes, Livspace, BookMyShow, and CarDekho have resorted to layoffs, salary-cuts, or both.
Watch: Startups forced to layoff during COVID-19 lockdown
As per a Nasscom survey, 70% of Indian startups don’t have sufficient cash runway for three months. The study examined the impact of Coronavirus pandemic on Indian startups. It also found that almost 40% of Indian startups have been forced to shut down completely or are about to cease operations soon.
The funding activities in India showed a massive decline since the start of March.
According to data from Venture Intelligence, March alone showed 50% less startup funding as compared to February. This further deteriorated in April and May. No major funding to any startup happened in these two months.
Loan Moratorium Induced Problems
Towards the end of March, the Reserve Bank of India (RBI) ordered banks and NBFCs to extend loan moratorium facilities to consumers. The RBI statement said, “All commercial, regional, rural, NBFCs, and small finance banks are being permitted to allow a three-month moratorium on payment of installments in respect of all term loan EMIs outstanding on March 31.” The moratorium was further extended until the end of August.
This decision of RBI has affected the liquidity of many fintech companies. They don’t sit on huge cash piles like their banking counterparts. Startups had to resort to salary cuts and layoffs to keep their businesses alive in these tough times.
India’s Revised FDI Policy
The Government of India has recently changed its FDI policy to limit “opportunistic takeovers/acquisitions of Indian companies” during this pandemic. As per the new order, an investor belonging to a nation that shares land borders with India will have to go through the approval route for making any investment in India.
This FDI norm has been creating fresh obstacles for Indian startups, as most of them rely on Chinese investors and VCs. Chinese VCs like Tencent and Alibaba back more than half of the 30 unicorns in India. The red-tapes have now become another woe of startups that are already lacking working capital.
The ‘Hire & Fire’ Culture – Is There A Way Out?
The Indian startups, in order to impress their investor bosses, often resort to an unrealistic expansion. Without any robust business model supporting the expansion, they hire in big numbers. Soon the reality kicks in, and they chose to rate-cuts by firing the workforce. This major fundamental flaw is prevalent in almost every other startup’s business model.
The traditional old big companies, on the other hand, have a reliable source of funding, and they have a realistic target for the future. This is the reason we haven’t seen any significant layoffs in these big companies.
The Indian startups should never undermine the value of talent and employee retention amidst the ‘always on toes’ culture.
The overwhelming competition sometimes pushes the startups to an unfeasible expansion that eventually becomes the reason for their fall. A reasonable pace in pursuance of short-term goals should be maintained so that the businesses can sustain themselves during the worst of times.