Effects of COVID-19 on Indian Start-ups

The dire state of Indian Start-ups due to COVID-19

India is a country that can definitely be described as a haven for entrepreneurship, as it has the third highest number of start-ups in the world. With fast-paced innovations in technology, and rapid economic growth, it would not be wrong to say that India has the potential to become an economic superpower in the near future.

2019 saw an increase in the investments in Indian start-ups. According to major research firm Tracxn, $14.5 billion was invested in start-ups in the year 2019, an increase of more than 30% from 2018. More than 1000 start-ups were launched in India. 9 companies joined the league as “Unicorns”- companies valued over $1 Billion. Tracxn also believes that 60 companies are soonicorns, or soon to be unicorns, which means that they have the potential to be unicorns in the near future.

Growth of international investors in start-ups: by Tracxn

After the massive increases in investments in 2019, many experts expected 2020 to be a year with even greater profits. However, all expectations were subverted, due to the spread of the novel coronavirus or COVID-19, causing a pandemic that swept through the nation, causing massive damage to every facet of society. The virus resulted in a loss of human lives, but also crippled the economic sector of India- to the point where India witnessed the largest GDP contraction ever in the second Quarter (April–June) of FY2020–2021 at -24%

This also harmed the growth of start-ups in India; According to a report by Venture Intelligence, funding in March 2020 fell by a whopping 50%, which spells trouble for all stakeholders. The plight of the start-ups was exacerbated by a change in the Foreign Direct Investment Policy. The change was made on 18th April, 2020, in order to “protect Indian companies from acquisition during the pandemic by its land neighbours”. This means that any investment by a country sharing land borders with India would have to receive approval from the Government of India, or The Reserve Bank of India, before being made. While this is an admirable step from the point of view of protecting domestic companies from foreign, particularly Chinese, control, this also means that any investment made would take longer than usual. Additionally, 18 of 30 unicorns are backed by Chinese venture capitalists and investors. Chinese investments are valued at about $8 billion, far more than the investments made by the rest of India’s neighbours combined.  

Yet, some start-ups have benefited from this pandemic, and have helped alleviate the damage caused by it. The E-commerce sector has made massive profits- the grocery segment saw a 76% hike in sales due to the high demand for door-to-door delivery services. Tech giant Amazon also reported huge profits in 2020, as did other ecommerce vendors. Uber launched “UberMedics”, to provide transportation in order to support frontline healthcare workers, while Ola provided 500 cars to the Karnataka State Government as a show of support.

Why the discrepancy? Several factors could have caused this. The lockdowns in India drastically affected the production of goods, which caused damage to the supply chain, thus hurting industries. In contrast, tech start-ups soared in value. Zoom, a hitherto relatively unknown company, became a household name over the course of a few months. Its value increased by 569%, raising its market cap to $129 billion, which means that it is one of 20 biggest tech companies in the USA. Zoom is but one example of a tech start-up that increased in market value. Still, the economy as a whole was suffering.

COVID cases reduced from November 2020 onwards- this gave the economy breathing space. However, it was a short-lived relief as India was hit by a second wave, often described as a ‘tsunami’, which brought with it mutant strains of the coronavirus.

The second wave of COVID has also negatively impacted the economy, albeit on a smaller scale, as industries are still functioning to a limited extent, and the chain of supply has not been completely broken. Vaccination drives for adults were also started on May 1, 2021, which will go a long way in helping the nation combat the pandemic.  Thus, things are beginning to look up for the economy. It is likely that India’s GDP will reach 2019 levels by 2022, after which start-ups will also most probably witness an increase in investments.

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