The times they are a-changin’. The same economy that a few weeks back seemed to be stabilising is now screaming recession.
There’s panic all around with equities falling like ninepins. The stock market has spent almost the same time in the cooling period as it has in trade while short-term debt instruments are witnessing millions in outflows every other day.
The contagious virus has hardly left anyone immune from it — not even startups despite their self-proclaimed promise of offering a way out through tech. Most of them are already financially unstable given they are just starting out. The economic slowdown has strangled their sources of revenue. Whatever respite they had in the form of more customers turning online for shopping after initial social distancing soon vanished as the lockdown was imposed, which barred most courier companies.
The global funding figures might not have dipped yet as suggested by some recent big rounds. Sequoia, one of the prominent investors, in a March 5 letter titled “Coronavirus: The Black Swan of 2020” asked the founders and CEOs of the times ahead to reconsider their expenditures and headcount as “private financing could soften significantly, as happened in 2001 and 2009”.
There’re plenty of startups whose industry is countercyclical to this virus. They will most probably come out as gainers
Unsurprisingly, early-stage startups are already feeling the pinch. IoTA Pakistan from Karachi raised $150,000 from Indonesian investors a while back, with a commitment of up to $500,000 total if key performance indicators (KPIs) were met. But with the coronavirus, all of that seems to have gone down the drain. “The force majeure clause (which deals with unforeseeable events) in the contract has been activated, thus relieving us of all obligations,” says the company’s CEO Waleed Ahmed.
“We are a hardware startup and were sourcing our input from China but started moving it to Indonesia after the coronavirus was initially reported. However, we couldn’t foresee that it will spread there as well and now all our manufacturing is disrupted, revenue gone, customer orders cancelled and salaries pending,” he adds.
Mr Ahmed also runs a tech-enabled trash management company, which was reportedly in advanced talks with a Philippines-based firm for raising capital. “We had even gotten the letter of investment from them and due diligence had started, but they withdrew it on Mar 11,” he says.
The situation is perhaps even worse for later-stage startups. Take Bykea, for example, which raised Series A of $5.7 million last May and was now in the process to get its B round. However, after the lockdown, it had to suspend its services and shut its app for a week as of today, bringing everything to a halt.
“Our app is shut today and clearly we cannot meet any of the KPIs set for March and April. So this truly is a black-swan event. As for fundraising, Covid-19 concerns will delay any round to close. Bykea continues to have investors with a very long-term focus given our network has a strong delivery capability, and we are hopeful that we will emerge even stronger out of this than we ever were,” says CEO Muneeb Maayr.
“Covid-19 has an immensely negative impact on fundraising, including for Bykea. With services down, international investors need to jump hoops to believe in a business to stay committed in a time of contraction and economic despair,” he adds.
Things are also going to change at the other side of the table as venture capital, one of the riskiest investments, will also see some recalibration. “Getting new capital will be very tough as on-site due diligence has become trickier. It would be hard to take view of the startup in the context of the market’s overall future. And not only for startups, but the venture capitalists (VCs) too because the amount of money directed to the country will likely see a reduction due to the risk associated with it,” says Rabeel Warraich, general partner at Sarmayacar, a Pakistan-focused VC.
It’s not only the deal value or volume that is going to be affected but also the terms of the agreement. What was already taking shape after the post-WeWork debacle will pick further pace as the balance of power will tilt in favour of the investor, leaving few takers for the lofty valuations and the top line–driven growth. “The willingness to sustain losses is a luxury of the past as now the focus will be on the startup’s unit economics,” says Mr Warraich.
This is not to say there won’t be deals. There are plenty of startups whose industry is countercyclical to this virus and they will most probably come out as gainers. A perfect example for this is Zoom, the teleconferencing platform, which has seen its market capitalisation double as a result of social distancing and remote working.
Locally too, some players are hoping for a change of fortunes. Take the sudden rise of learning management systems that educational institutions have had to deploy. “We have had more enquiries in the past two weeks than in the last six months,” according to Muhammad Zubair of Queno, a startup providing enterprise resource planning software to schools.
Eyeing such opportunities are the VCs, which already have some dry powder to be deployed. “We have just closed our investment in Dawaai.pk, one of the largest online pharmacies, (which unsurprisingly has seen a spike in sales after the coronavirus outbreak but has been in the space for around six years). And other than that too, we are looking for startups in spaces that might see a behavioural shift in the post-coronavirus world, such as edtech or fintech,” says Mr Warraich.
To avoid any strain on the still nascent sector, one possible route is that the government plays a larger role just like France did with over four billion euros earmarked for startups. Though given the local ecosystem’s relative insignificance towards both the overall GDP and labour force, it’d be unreasonable to expect much.
For its part, the Higher Education Commission has disclosed grants of up to Rs15m for innovation related to Covid-19. Needless to say, it’s quite specific and won’t help startups struggling to pay their overheads.
Published in Dawn, The Business and Finance Weekly, March 30th, 2020