Can startups navigate a Black Swan event?

Startups are constantly grappling with uncertainty ranging from changing investor sentiment around funding, business environment, competitive landscape among others. The outbreak of Coronavirus though is an unprecedented event. Clearly a Black Swan event, COVID-19, will bring out the best among startups with only the most focussed ones surviving.

“I see a replay of 2008 (Lehman Brothers crisis) scenario. We are seeing a very choppy business environment. It’s the time when the grain gets separated from the chaff. In the end we will know who was swimming without shorts,” said Deep Kalra, Chairman, Makemytrip.com.

One big question marks is nobody knows when the end of COVID-19 driven crisis might be in a few weeks, few months or a few quarters.

But one thing is clear; the path to scaling up and profitability becomes even more challenging for the hundreds of startups which attracted a record $10 billion in venture investments in 2019. Kalra, along with Rajan Anandan, Managing Director, Sequoia Capital and Yashish Dahiya, co-founder & CEO Policy bazaar were part of the panel discussion ‘Profitability and good governance the path to scaling Indian Startups’ discussing wide ranging issues from navigating COVID19 impact to, business outlook, unit economics and more.

On an optimistic note Anandan said, “Some of the best companies in the world were founded during crises - like Cisco and Airbnb.” In the short term however, for existing startups, he added, “We see demand slowing down, funding rounds will also slow down, sales forecast will be less reliable.

This is not a 30-day phenomenon but could go on for three quarters and for startups three quarters is a lot.”

Type of business determines how profitable that business can get, according to Anandan. For example, Freshworks, Druva are Unicorns with 70-80% gross margins.

Some of the ideas around edtech (education tech) can be very profitable and have high gross margins. “If you have a business where the average order value is low and you have to subsidise the order for the consumer to buy and build a large scale logistic network, that’s an inherently low gross margin business and unit economics are very difficult,” Anandan added. Most startups are in the second bucket with low gross margin, low order volumes and lot of subsidies. The latter set could see tough times ahead.