The Impact of Covid-19 on India\\\'s Startup Ecosystem

The Impact of Covid-19 on India\\\'s Startup Ecosystem

COVID-19 has adversely impacted the overall investment sector. While businesses across all sectors can sense the consequences of COVID-19, start-ups have particularly been one of the most vulnerable, and in fact, are facing various formidable challenges both, from a business as well as from an operations' perspective. Most start-ups have witnessed a decline in supply and or demand, except for those start-ups that are engaged in the supply and, or delivery of 'essential services', educational technology, gaming or streaming services. Notwithstanding the above, malfunctions in the supply chain network have either way presented challenges for all start-ups. However, the start-up ecosystem has been continuously determined to adapt to the present situation as flexibly as possible, by focusing on the need to innovate and differentiate their business techniques and its operations.

In the past couple of years, the start-up ecosystem in India has emerged as a reckoning force, largely attributable to the efforts of the stakeholders, and the initiatives implemented by the government to facilitate the growth of the start-ups. Investments in start-ups have dramatically surged to $14.5 billion in 2019 from the previously $550 million in 2010.

Notes and guidance issued for Start-ups:-

A note named as Coronavirus: The Black Swan of 2020, was issued by the Sequoia Capital addressing its portfolio company founders and CEOs, highlighting the need to be 'adaptable'  to survive the downturn.The note highlighted the need for questioning every assumption about one's business aboutcash-flows, fund-raising, marketing, sales forecast, capital spending etc.

Likewise, a group consisting of ten leading venture capitalists have issued a guide titled as Best Practices for Founders in the wake of Covid-19 which provides for guidance on various features related to start-ups, including among others, fund-raising, restructuring, business continuity plans, and so on. The guide further prescribes that the priorities of a company should be in the following order - "first employee safety, second business continuity, and third, liquidity and runway a key." The guide also specified the need to keep abreast of government directions and advises to seek legal assistance when necessary.

COVID-19's impact on Start-ups:-

It is suggestive that the value of investments in India has fallen to $0.33 billion in March 2020 from $1.73 billion in March 2019, which indicates a fall of nearly 81.1%4.There has been a total fall of 50% in the number of companies funded - presently, 69 firms in March 2020, in contrast to 136 firms in March. Further sources suggested that sometime between mid-February, 2020 and end of March, Several investors have also pulled back from closing current funding rounds. Thus, one of the major challenges faced by the start-ups has now become sourcing funds, which has resulted in cash flow issues, for many.

The lock-down has not only impacted the daily business operations, but it has also forced a good-many start-ups into preparing for contingency plans to limit workforce and to cut down employee salaries. Various start-up company founders have also taken pay-cuts to limit the losses faced.

COVID-19 Start-up Assistance Scheme:-

A.After recognizing the numerous financial and operational challenges faced by start-ups, the Small Industries Development Bank of India ("SIDBI"), which also operates as an implementing agency for the 'Fund of Funds' for start-ups, has promulgated a 'COVID-19 Start-up Assistance Scheme' (hereinafter "the Scheme") which is intended assistcertain eligible start-ups that have successfully demonstrated the ability to implement innovative measures to ensure business continuity amidst the COVID-19 crisis, employee safety as also financial stability.

Eligibility criteria under the Scheme include the following:-

•at least 50 employees;
•a positive net worth;
•received funding through SEBI registered alternate investment funds or VC/PE/Angel funds that invest in start-ups;
•a minimum turnover between INR 20-60 croreswhich is for the Financial year 2019 and Financial year 2020;
•been incorporated for less than ten years; and meets the requirement of the promoters and, or founders of the start-up having invested their own businesses.

As per the scheme, the start-ups that were EBITDA positive in December, or, project a positive EBITDA for the quarter ending June,would also be included.

Furthermore, under the Scheme, working capital loans of up to INR 2 crores at an interest rate of 10.5% would be provided to eligible start-ups for a period extendable to 36 months.

Responses received from Start-ups:-

Various start-up companies have requested the SIDBI to review the Scheme by releasing the eligibility criteria as initially prescribed, for further relaxations. Requests have also been made to SIDBI requesting to expedite the transfer of funds from the 'Funds of Funds' to support the start-ups in these pressing times.

Additionally, to ensure liquidity, certain demands relating to the facilitation investment by large corporates into start-ups as part of the corporate social responsibility initiatives, have also been made.

B.The Ministry of Corporate Affairs ("MCA") has also provided temporary relaxations to all corporates for compliances under the Companies Act, 2013. These include among others: (i) waiver of additional fees on late filings made with the MCA; (ii) relaxations about the holding of board meetings with the physical presence of directors; (iii) extension of the prescribed interval period between board meetings; and (iv) relaxation of the 'minimum residency' requirement of a director. Please read here out detailed coverage on the temporary relaxations introduced by the SEBI and MCA.

Furthermore, vide a notification dated March 24, 2020, the Ministry has also increased the threshold for default for initiating corporate insolvency INR 1 crore (from INR 1 Lakh). The Reserve Bank of India ("RBI") has also drawn up a 'COVID-19 regulatory package' which is intended at reducing the burden of debt-servicing and aims at easing working-capital requirements, according to which lending institutions would be permitted to grant a moratorium of three-months (i.e. from March to May) on payments of instalments on loans, that are outstanding as of March 1, 2020. Further, various timelines including the ones for filing of certain income tax and GST returns have been extended.

The various relaxations that have been introduced by the regulatory bodies are aimed at easing the financial burden of corporate houses, including the start-ups and to facilitate the day-to-day business operations.

The stakeholders of the start-up community in a letter dated March 30, 2020, addressing the Finance Ministry, have requested the government to provide for further benefits to start-ups including, among others:

•reimbursement of (at least) 50% of the salary bills and contract wages paid by start-ups;
•establishing unique credit models, that can provide loans with a low-interest rate against the GST/IT refunds;
•deferral of interest payments along with access to quick short-term loan plans and schemes; and
•provisions of expedited refunds for the IT/GST returns that have been filed.


Given the global scale pandemic and the uncertain economic situations spurred by it, there is a strong likelihood that fundraising for start-ups would become a significant challenge in the future, since various investors may prefer to focus their future fund placements only on the prevailing portfolio companies, to ensure that they can tide over the present global crisis.Start-ups are likely to witness heavy negotiations on deal valuations since the new investors may now demand bargains or discounts in the value, which may result in potential delays in the deal execution and closing. Investors may also adopt a more cautious approach towards funding and would also insist on thorough diligence (both commercial as well as legal) of the subject start-ups' business prospects, including any/all contingency plans implemented during the COVID-19, to ascertain sustainability of the start-up in the longer-run.


I. AshimaObhan and AkankshaDua, Impact Of COVID-19 On Indian Startups,, 24 September.
II. Sandeep Singh, Covid-19 Impact on The Indian Startup Ecosystem: Threats and Opportunities, 30 April.
III. SindhuKashyap, How the coronavirus outbreak has impacted startup ecosystems in India and China,, 19 February.