How Coronavirus Will Affect the Start-Up Industry And Overall Economy
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The coronavirus is officially a pandemic now and all companies (start-up or established) are facing an unprecedented challenge. Bill Gates warned that a virus could lead to a global economic depression.
Once the world realized that the effects of COVID-19 are going to last for a long time, people began to scramble for the plan-B. Sequoia Capital, one of the most respected names in the venture capital industry around issued a Black Swan advisory to its portfolio companies, asking them to conserve cash and cut spends.
Industries across the board have been hit. Aviation consultancy Centre for Asia Pacific Aviation (CAPA) has said that airlines across the world might go bankrupt by May. Hotels are reporting a 95 per cent dip in occupancy rates. March to May has been a complete washout in Indian tourism. Bookings for June-December are down by over 80 per cent. Business of cab services were already down 30-40 per cent since February.
What Does This Mean For Start-Ups?
Let’s put it this way. If you are an early-stage start-up then you are going to float. The only costs you have to worry about are yourself/founders. If you are a start-up looking for angel funding, you are good. You can raise the funds you need locally.
WFH Good For Business, Not For Funding
If you have just raised a round of funding or if you have funds for the next six months, you are good. However start-ups in the middle of series A, B and C rounds will be hit the mostas such investments require several rounds of meetings and due-diligence between the investors and the co-founders. Since investment firms that lead big investment rounds are based in different parts of the world, it’s not feasible for them to close investment rounds in current circumstances. There are already reports of some of the big investors putting their investment plans on hold for the time being. Big rounds of investment take time to fructify and cannot be closed without meeting the co-founders in person. These are challenging times, but I guess a few investors might soon come out with a way as how to close larger deals remotely.
Funds Stuck In Stock Markets
Start-ups generally approach large family offices for bridge loans in between investments. This is mainly done to cover cash flow so that start-ups can tide over for a couple of months until the funding comes in. However, it is possible that this source of funding might also dry up. Large family offices that invest/loan money to start-ups typically have a certain amount of their own funds invested in stock markets across the world. With markets recording over 20 per cent decline, it is unlikely that any of these offices will deploy funds into start-ups until their stock portfolios improve.
Which Start-Up To Invest In
A major trend that will hurt the start-up sector is their ‘burn cash to grow’ strategy. Start-ups across have burned billions of dollars in their quest for growth. As funding dries up, start-ups will be forced to look at profits. It’s a given that there is will be a global recession for the next quarter or two. It’s going be harder for businesses to increase consumers and show traction. Consumers may not buy as much as they used to. The growth metric of these start-ups will suffer making it even more difficult for them to raise a round of funding. Venture funds will have a simple choice: Should I focus on my best-performers or should I risk it on questionable companies? The answer is not tough.