Fear versus Fortune: When the disruptors face disruption

Most of the articles about Covid impact on startups are just as confusing as the disease itself. Which is the moot question: If you don’t understand something (the disease in today's scenario) how can you determine the impact? 

Rather than take a long term view of the disease and its impact, the more practical approach for startups is perhaps to just expect an extremely uncertain world. 

Startups are used to uncertainty. It is in this uncertainty that they are able to thrive to beat their mighty competitors and create value. This is really prime time for the quick and the agile startups. In uncertain times, demand and supply matching is in itself a big opportunity. Countless Amazon resellers who were selling Chinese electronics overnight moved to selling healthcare products to hospitals and consumers. Likewise, in India, foodtech companies morphed into grocery delivery providers while the hospitality sector is looking to convert to hospitals. You can bet more changes and new businesses are round the corner. 

 In such crazy times, if there is one constant factor it is the disappearance of capital.

Many investors want to hold cash or risk-free government bonds. Companies who are looking to raise money now will see a sharp increase in the time spent and an even sharper decrease in valuations. Wealth creation can only happen if you survive the lockdown and beyond. 

Hence, it makes more sense now to raise money even at a lower valuation or negotiate a valuation based on a future fund-raise for most companies. Timelines will be elongated due to slower decision making and documentation during such times. In the rest of business areas too, uncertainty about orders and cash flows would be the rule. Companies may be better off in taking worst case scenarios while making revenue projections while keeping costs as a given. Offering deep cash discounts and re-negotiating contracts would create winners. Creating new products which are cheaper and have lower customer commitments are worthy of exploring especially if operational teams have slack time.

The most negatively impacted are one whose business has almost reached zero and even if the lockdown is lifted it is very unlikely to revive for a considerable period of time. For such founders pivoting or reinventing their business is crucial in high touch sectors like hospitality, travel, events and malls management. The pivots could be around their customers and technology knowledge. Another possibility is to look for consolidation within the industry rather than wait for a certain death that awaits the majority. 

While some businesses now will be negatively affected in the short term, their long-term prospects largely remain unchanged. These include many in the manufacturing sector or e-commerce whose operations have been restricted by the lockdown. Such startups could do well to revisit their product or service offering to make it less touch intensive or adding remote customization features. To increase their runway, such companies could also look to raising capital at a discount to a future round apart from exploring debt alternatives. Those who are well funded could also consider acquiring companies in related areas at a bargain to consolidate their position.

Case Study 01: An India based company operated in B2C and B2B services in the automotive sector. Post lockdown the company’s operations came to a standstill. Supported by Lead Angels, the company significantly reduced its burn by re-negotiating its rental agreements and employee contracts to bring its burn down by 80%. The company further added an essential delivery line of business to cater to its customers and is raising some capital at very favourable terms from investors. The company post fund-raise will have a 12 month runway even if lock-down remains in force. 

Next are businesses who may have an upswing post Covid-19 but the long term conditions remain almost static. These could be e-commerce delivery companies in food or healthcare services. Such businesses could potentially raise quick money to increase scale and even look for further diversification before the situation changes. 

Finally, there  are companies who have both a short term and a likely long term improvement in prospects. These lucky few have a great story for both investors and customers. Speed is critical for them too, before competition runs away with their customers. 

 While the going is good, these companies in sectors like edtech, collaborative software and remote diagnostics may be able to raise money quite easily, as  The bold investors, which are few and far in between, are on the lookout for Rockstar founders who can convert poison (Covid-19 situation) into a pill.

Case Study 2: A North America based company incubated by a leading university operates in the area of customer contact center analytics. The WFH phenomenon greatly increased the need for analyzing contact agent performance and customer feedback. Assisted by Lead Angels, the company was able to get a number of leads for enterprise clients and as well as connect to angel & institutional venture funds. The company has now increased its fundraise target and enroute to achieving it.

Case Study 3: A India based edtech company was providing some basic skills to K12 students through a downloadable app. The company was selling this via schools. In the post Covid environment, the company saw a huge increase in its B2C customers due to the fact that schools were closed. The company currently has a run-rate of 12 crore ARR and is in the process of raising a bridge round with the support of Lead Angels Network.

While most startups are worried about the future like the rest of us, it is actually a great time for startups and even wannabe entrepreneurs to be both critical and creative in their business models and create fortunes instead of fear. The economic slowdowns historically, have churned out the best of the companies and we are sure, it will be the same this time. 

As they say gold gets its value, only by passing through fire.  

Manish Johari

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Manish Johari is senior vice president at Lead Angels. The views in this article are his own.