#StartupsVsCovid19: Matrix Partners’ Lessons From China For Indian Founders

On Sunday evening, when we came out to clap for those offering essential services, most of us probably missed out on thanking India’s startup founders. Well, but for them, many of us would not have been able to sit at home and still continue to work, study or eat.

Many startups are doing commendable work in not only taking care of their employees but also helping the government tackle the situation. For instance, OYO has offered to turn hotels into quarantine centres and Paytm CEO Vijay Shekhar Sharma has said that he would be giving up his salary for the next two months. There are startups trying to make ventilators and testing labs and there are ones bringing food, milk and groceries to our plates.

However, at the same time, the reality is that the startup ecosystem is shattered just like the rest of the world. They are perplexed about many things, the present and the future. Starting from handling the new way of working (work from home) and ensuring all employees stay healthy to building new products suitable for the current situation and managing cash flow, the startups have too many things to do to deal with.

Venture capital firm Matrix Partners India has thus come out with an elaborate guide for the startup community on the difficult choices to make. This was based on the firm’s call with Harry Man, managing director at Matrix Partners China for its portfolio founders. The firm got first-hand information about the impact of Covid-19 on the startup ecosystem in China and what life is currently like on the ground.

Three Possible Business Scenarios For Startups

Matrix Partners India explained three possible scenarios that India’s startup ecosystem can expect. First, where there is a linear increase and gradual improvement. Second, in which there is a sudden drop in businesses and a rapid rebound. Third and the last scenario is when “India is the world’s pariah.”

U-shaped Recovery

This is the current situation India is in and the most positive situation of the three scenarios explained. In this, there is a linear increase in infections with continued fear of exponential increase and businesses are functioning at 60-90%. This situation assumes no community transmission happens in India.

Progressive restrictions will lead to selective lockdowns and recovery is also fearful. With this kind of U-shaped recovery, infections start reducing globally on a daily basis, like in China towards the end of February. This means, for India it would be 6–8 weeks from now. Markets and sentiment will come back in the second half of 2020 but the economy takes till first half 2021 to recover.

Under this scenario, the worst-case impact would be 50%–70% for non-travel sectors. In this, watching out for winter complacence and the second wave of infections will be essential. Progress on vaccination and treatment will be key.

V-shaped recovery

In this, there could be lockdown in main cities and affected areas even without signs of community transmission. However, restrictions start getting progressively relaxed starting in two to three weeks assuming no community transmission happens. This could see a likely faster recovery and a sharp rebound in markets and sentiment, which would be “India dodged it”/”India did a great job”.

The recovery would see higher levels of confidence and markets would rebound quickly. Macroeconomy will start a recovery for domestic demand in the second half of 2020. However, travel and export sectors will lag. “Best way to think about it is that three to four months out will be at 70% of before the starting point for most sectors,” says the firm. However, again one has to watch out for winter complacence and 2nd coming and progress on vaccination and treatment will be key.

L-Shaped Recovery

This is the most feared scenario wherein community transmission kicks in and India goes on an exponential curve of coronavirus cases. Here, the epidemic plays out through June (monsoon) with painful human and economic costs. There will also be a continued fear for recurrence in winter. The VC firm calls it, “India is the world’s pariah.”

The firm also shared first-hand information about the impact of Covid-19 on the startups in China and what life is on the ground. “Startups in China that were predicting that the recovery would begin by April are now expecting the recovery to take at least another 3 months. For countries like India which are seeing cases grow now, companies can possibly expect the recovery to take longer, maybe 4 months,” said Matrix Partners India in its blog.

Startups Focus On Core Assets

According to Matrix Partners India, companies in China are expecting fundraising to be delayed till there is clarity on economic recovery and there could be few new deals in the first half of 2020.

In India, startups are currently focussing on core assets. People, stakeholders and partners are the topmost priorities. They are additionally reevaluating rental agreements, reducing vendors and commitments, reviewing headcount and hiring plans and focussing on core business.

The third focus is on matching cash outflows to inflows assessing working capital cycle acutely. Additionally, they are reviewing inventory positions for future disruption, topping up debt to extend runway and moving deposits to top three banks.

Productivity is also a concern for startups currently, particularly for teams such as sales, warehouse or delivery staff and customer support. There is also a concern to manage data security and remote tech support issues. To manage, many startups are relying on task management tools, evaluating using VPNs for data security and moving to a daily planning cycle.

Startup Lessons From China

Startups in China that were predicting that the recovery would begin by April are now expecting the recovery to take at least another three months, according to the inputs received by the firm.

However, some sectors, including grocery and food, ecommerce, retail are witnessing growth. According to the blog, even with all these challenges, the food and grocery delivery industry are seeing over 3X growth. Additionally, while discretionary spending has fallen significantly and categories like beauty and fashion have been affected, ecommerce players who have tighter control over their delivery fleet and can guarantee a time slot are growing their market share.

In China, people have begun going to the supermarket two months after the outbreak, but footfalls are still nowhere close to normal. “More than 60% of shops may be open but business is 20-30% of peak demand because consumers are still not ready to risk entering crowded spaces,” according to Matrix Partners India.

Also, lending companies have been significantly affected because in these tough times people are conserving cash or can’t repay their loans though online insurance is sky-rocketing. because field-sales agents of traditional insurance companies are not able to meet demand.

Video streaming, mobile gaming, and other digital services and online education have been seeing a great spike. “But people are signing up only for 2-3 months,” said the VC.

While hoping that efforts by the government and citizens bear fruit and that there won’t be a large-scale outbreak of Covid-19 in the country, Matrix Partners India suggested the following steps for startups:

• Don’t let a crisis go waste
• Ask yourself how to turn this into an opportunity
• Opportunity to cut extra cost/ flab
• Opportunity to find new tech/product solutions that can scale without more
  manpower
• Opportunity to find new revenue streams etc.
• Opportunity to become scenario 1 if you are scenario 2 when the market recovers
• Opportunity to engage your customers and suppliers who are all at home

Update: The headline has been updated as requested by Matrix Partners India. The earlier headline read: Matrix Partners  Shares Survival Lessons From China For India’s Startups