#StartupsVsCovid19: Startups Need To Look At Mergers, ESOPs To Ease Cost-Cutting Burden, Says Mohandas Pai

As India is facing one of the longest economic slowdowns in its history and perhaps the longest in the past 23 years, the idea of being “ignored and overlooked” has become a common bugbear for the startup ecosystem. Take the Union Budget 2020 for instance, where startups, investors agreed that the government has been successful in identifying their issues, but there was no resolution to these issues.

Suddenly, things have changed fast, and for the worse. The Covid-19 pandemic has changed the entire market equation with over 70K deaths world over, the combined market cap of stock market companies has declined by over $27 Tn, oil prices at historic low and some of the biggest developing economies like India is estimated to grow at 2.5%-3%.

As the International Labour Organization estimates around 25 Mn layoffs worldwide, the recession is well and truly here. And, unlike many other past recessions, this one offers limited opportunities and choice for startups particularly ecommerce, supply chain, and many other sectors to deal with the situation.

As we have been covering the #StartupsVsCovid19 developments very closely, it’s clear that the pandemic has taken a toll on startups with some of them even looking to down their shutters amid increasing cash crunch.

What should be the way forward? What are the hard decisions that startups must take in time to survive the pandemic? Inc42 speaks to TV Mohandas Pai, partner, Aarin Capital and former CFO, Infosys

Cut The Cash Outflow, Maximise It For The Next 12 Months

The situation is unparalleled and the remedies unprecedented. The founders may have to take hard decisions including not taking their own salaries for a few months, said Pai adding that whatever be the situation, transparency is utmost important. Founders should sit together with the entire team and come up with a common idea and shared vision.

“Shared vision is important. Each team must look into the past, what they have achieved together and what they can do in the upcoming future as part of the shared vision.”

However, in the process, cutting costs to survive is essential which must not be looked at negatively, rather as part of the company’s future business strategy as most of the startups may not be able to raise any funding for the next 12 months, Pai added.

Use ESOPs To Reduce Salary Burden

As startups face the biggest cash crunch in their lifetimes, many founders have already agreed to give up salaries for a few months. But what if the situation worsens? While multinationals such as Disney which made billions from its Avengers franchise have also begun to furlough employees, many of the startups too have laid off their employees, as part of the cost cut.

Finding the balance between the business loss and human capital factors is critical and essential.

In such a scenario, Pai suggests a rescue plan. In order to cut the costs and keep the cash plan, employees too will have to give away a high percentage of their salaries. However, the founders must tell the employees who are ready to sacrifice their salaries that the same would be restored through employee stock ownership plan (ESOPs). This will not only keep employees motivated but also keep team spirits high in a tough time.

Startups Must Be Open To Merger Plans

It’s not just about the companies, but the low consumer spending too which makes the market tougher for many startups, said Pai. India is already witnessing the lowest consumer spending since it started collecting the relevant data. Now due to this pandemic, people are very cautious and are not going to spend money for a while. The market, thus, is going to be very tough.

“In such a scenario, if the feasibility is very low, startups must look at competitors, the big players and think of merger plans. I think 2-3 startups who are competing with each other should consider coming together and become a bigger company.”

This will cut the unnecessary cost that many of these startups have to spend while fighting with their competitors. Such a merger plan will cut the costs, maximise the cash and number of consumers, Pai added.

Rethink Profit Models To Dodge Covid-19 Impact

The road ahead is not going to be easy for startups as there won’t be any easy way to raise funding, Pai said. It’s now essential for startups, more than ever, to devise a profitable plan instead.

“There is no point in companies offering discounts, lowering prices.”

Startups will have to focus on a futuristic profitable revenue model that works. They will have to relook into the existing revenue models and marketing approach, where spending could be minimised and maximised. Since everyone is working from home, the marketing plan too should be devised accordingly, according to Pai. The conventional methods of strategic planning will fade away in future.

Most of the startups have a business model based on giving discounts to customers, or lowering prices to beat the competition or on high spending which includes acquiring unnecessarily extra assets such as furniture etc. This has to change and the focus must be on sustainable pricing.

Work From Home Is The New Norm

Yes, working from home (WFH) is going to become a prominent culture in the future, particularly for startups. There are IT tools for tracking productivity, video meetings, and for a host of other operations when working from home. While most cities have robust internet connectivity now, power remains an issue for many homes. However, that is manageable.

“Now onwards, probably a minimum 25-30% of the entire workforce will be working from home and that will be a new normal. This will not only save the 2-3 hours of every employee’s daily commuting hours but will help them keep healthy as well.”

The Covid-19 pandemic has forced people to opt for work from home. There are perks as well. Pai refers to the stressed urban infrastructures and commuting, which he thinks was a waste of time. And it’s not just about Bengaluru traffic, but this is a harsh reality of every metro city nowadays. Bengaluru, Mumbai, Hyderabad, or Delhi — traffic is more or less horrible.

Digital Economy Comes To The Centre

The Indian economy is continuously on a downslide and according to Pai, India’s GDP for 2020-21 is going to be as low as 2.5%-3%, instead of 5% and 6% of the last two years.

However, there is good news as well. “Everyone is increasingly consuming stuff digitally. Therefore the digital future is much more robust. Right now, even if people are sitting at home, they are buying online. They are reading news on digital platforms. Similarly, digital education is bound to grow.

As digital consumption is the new hobby, digital media, digital education, and digital entertainment will be an essential part of the future economy.