"The VC community makes money during the good times, and makes its reputation during the hard times"

Tough times face India’s star-studded start-up ecosystem, but is there light at the end of the tunnel?

Tough times face India’s star-studded start-up ecosystem, but is there light at the end of the tunnel? That India’s start-up space has been on a roll since 2016 is an understatement. The country’s confounding and frequently downgraded growth projections notwithstanding, investors have bet big bucks on Indian start-ups. According to an EY report, investments by private equity (PE) players and venture capitalists (VCs) in start-ups have been rising each year — from $3.1 billion in 2016 to $7.9 billion in 2019 (See: Big-ticket deals). In fact, last year marked a record high for start-up investments both in terms of value as well as volume. Understandably, the ecosystem was optimistic about the new decade, until the spread of coronavirus threw a spanner in the works. During such times, who better than serial entrepreneur and promoter of several start-ups including Bigbasket, Portea Medical and HungerBox to discuss the impact of the pandemic on Indian start-ups? In this exclusive interview with Outlook Business, K Ganesh, co-founder, GrowthStory says how start-ups are dealing with the crisis and what they must do to survive.

How have the dynamics changed since last year?
We saw some major developments in 2019 that impacted sentiment and shifted focus toward unit metrics and profitability. Vanity metrics and the concept of ‘growth at any cost’ were taking a back seat. This shift was largely led by herd mentality, because of what happened at SoftBank, WeWork, and the fact that Uber and Lyft IPOs were not blockbusters. But it was understandable and we were all ready to handle that; only the pitch decks and memorandums were changed. But this pandemic came out of nowhere, something that no one was prepared for. Now, it is a world-war situation from what earlier seemed like a skirmish at the border.

Does the VC/PE point of view get impacted due to the crisis?
The venture capital/private equity segment is a long-term play. A typical period (before expecting return) is about 10 years — seven-year front plus another year or two. Every investor, be it a high-net-worth individual, pension fund investor, or an institutional investor, knows that it is a high risk, high reward segment. Hence, venture capital won’t change as an asset class over the medium- and long term. Over the short term, it’s a different story. Within their portfolios, VCs may have certain companies that were in the last phase of raising funds, which will get delayed because of the lockdown. That means the VCs will have to forcibly support such companies and maintain a war chest. So, they will not have enough for new companies and entrepreneurs will see lower investments in the near future. 

What about the deals that were already in the making? 
Wherever term sheets were ready, negotiations came to a standstill. It’s unfortunate because the founders would have worked on the deals for months, and they must be running out of money. If they have a supportive investor, they will be able to ride the crisis. Otherwise, they are in trouble.

Some VCs are trying to use this time to renegotiate their terms and withdraw their term sheets. This is slightly counterproductive because in this community, if you have given your word or shaken hands, even if a legally binding term sheet doesn’t exist, you need to honour your deal. Else, the word goes around.

It is said that the VC community makes money during the good times. However, it makes its reputation during the hard times. More established and mature VCs know that you cannot be in the venture capital business if you take short-term decisions. Hopefully, that will settle soon.

One of the biggest brands in your portfolio Bigbasket has been facing challenges in fulfilling orders. How is the company coping? 
Our portfolio includes companies across both B2B and B2C sectors. There are three phases to how companies will perform. The current phase is one in which there is uncertainty about the future, the second one is return to normalcy and the third is adjusting to the new normal, which includes changes in consumer behaviour. 

In phase one, there are companies such as Bigbasket, which have seen a huge increase in orders. The challenges that it is facing is not a business challenge, it is the sudden change in consumer behaviour. It is a bit like how people were driven to digital payments during demonetisation. People are trying online grocery shopping and, even after normalcy returns, many will continue with this change. The challenge right now is getting permission for last-mile logistics, warehouse and supplies to be filled, and convince migrant labourers to stay. So, while the orders are going through the roof, the number of available workers is dropping. But it’s an entrepreneur’s dream come true. Where else can you get a situation where you get 100 orders and can fulfill only 20? 

What about the other companies such as Portea Medical? How have they been impacted?
In the case of Portea Medical, it has both opportunities and challenges. For instance, we are the largest employers of physiotherapists in the country, where practitioners go to patients’ homes. Most of it is elective (not a medical emergency). Because of social distancing and the lockdown, people don’t want to get these therapies done anymore. There were a lot of procedures that could be done at home but were being done at clinics and hospitals. So, on the positive side, since people don’t want to visit hospitals because of risk of catching infections, they are turning to services such as Portea. Like in the case of e-grocery, they may get used to the comfort and more healthcare will shift to homes. Right now, Portea is shifting away from physiotherapy solutions to home-quarantine ones. For instance, if you are at home and suspect to be COVID-19 positive, you could get solutions and support.

Which companies, according to you have been worst hit?
B2B businesses in the travel segment have been badly affected. Even after the quarantine, people will think twice about stay and travel. We are fortunate that we don’t have companies in that segment. But one of businesses, HungerBox, which manages corporate kitchens digitally, is facing challenges. Even though we expect the business to bounce back, we might see 10% drop in revenue because people are now used to working from home. The upside is that despite 750,000 orders per day, penetration is so low that there is massive room to bring in more clients. 

However, there are other companies in our portfolio such as, an AI chatbot company, which has seen demand go through the roof. Essentially, it reduces the number of people required for customer service due to its chat bot services. We were chasing an international airline company to implement our service, but they refused. When the crisis hit, they came to us. So, once the lockdown is over, they will send their APIs (for linking the chat-bot services to the airline’s customer services). Nevertheless, there is overall stress. Companies are burning money without much business. 

Do you know of companies outside GrowthStory’s portfolio that have managed the crisis well?
It’s too early to say because the lockdown happened all of a sudden. Besides online groceries, online education and gaming have been winners. Others such as video-conferencing app Zoom, Google Hangouts and telecom companies have also benefitted. 

What advice would you give to start-ups to minimise the impact of the crisis?
If you are not nimble or flexible, you cannot survive. But if you survive, you will benefit disproportionately. Hence, do everything to survive this. Shrink yourself, mold yourself, and take tough decisions because that’s when leaders are tested. Get your team together. It’s almost like a war. What do you do during a war? You are not trying to build new houses and expand to new locations. You try to get through the war and survive the bombs. After that, you can expand.

We entrepreneurs are optimistic by nature, we want to conquer the world, grow, expand, and experience all the ra-ra associated with it. That time will also come. People will not stop eating, people won’t get so fit that they won’t need healthcare. They are not going to change drastically and the world will bounce back to normalcy. Some preferences will change and some sections may take longer to recover. So, all we have to do is survive.

But what should start-ups do to survive this?
You need to conserve cash. VCs and investors aren’t talking to new start-ups because they are handling their own portfolio companies. New funds will be hard to come by. So, start-ups need to make their existing cash last as long as possible. That should be done by reducing expenses as much as possible and delay certain payments such as seeking leeway in rental outflow. They could ask their landlords to adjust it against their deposit. In Bengaluru, the usual deposit is 10 months’ worth of rent, so they could ask them if they can adjust the amount for the next five months.

Would lay-offs be recommended as part of the plan?
First, you need to see if senior management could take a cut in their salaries. For many, salaries are significantly higher than their expenses. Maybe they could part with the salary in lieu of stock. This is the time to double-down on stocks and shares. You could tell them that it’s not a pay cut but just an exchange in kind for the next six months. 

If you don’t see business coming back, you have no choice left but to lay off. I am 58-years old and I have never seen a pandemic. It’s a once-in-a-100-years event, so you need to take really hard decisions. It’s not going to be easy on the employees or the employers. But, where will the money come from? If you don’t get your salary, how are you going to keep your driver and help?

I have seen multiple cycles, starting from the ’90s. There have been many companies that were transparent and employees who were more than willing to contribute. The resilience of Indian employees is phenomenal. The last time I did this was during the Lehman Brothers crisis at TutorVista. We had to lay off two-thirds of the employees and I told them that it had nothing to do with their performance. Not much happened to the company and we hired many of them back. In fact, many of them joined us as co-founders in our portfolio companies at GrowthStory. Do it right and you won’t get any hate. Even during non-pandemic times, there’s no guarantee of employment. Factories shut down all the time, but the media only creates hullaballoo around Oyo laying off 2,000 employees. They hire 12,000 employees, so it’s okay to lay off 2,000.

Is there a role that the government can play to soften the impact of the crisis?
The RBI and the finance minister have announced relief measures for certain sections of the society. I hope that they will come up with additional measures for societies that are yet to be addressed. Start-ups and SMEs require a lot of support. The first runs on frugal cash and the latter hand-to-mouth. So, banks could give soft loans on easy terms based on one’s stocks and payment cycles. GST and other taxes could be deferred while ensuring GST refunds are being transferred immediately. This would all help companies conserve cash and not run out of working capital. 

Any lifestyle changes you have made to maintain productivity during work-from-home?
Right now, the attempt is to maintain collaborative work with the team the way we used to when in office. We touch base once in the morning and once in the evening to brainstorm. We are used to seeing human faces, so we get on Zoom, WebEx, see each other and smile. We are social animals and that contact should not be lost. Also, it is important to follow a routine. Just because you work from home doesn’t mean it’s a holiday. One benefit I see out of this is that now instead of going to meetings and losing time, we just send crisp e-mails as briefs before the Zoom call. 

Personally, I have a certain space that I occupy at home when working, where I feel professional. Earlier, I would sit on the bed with the laptop and phone. But when you are working from home for long periods, you need to dedicate a space for work. I sit erect, and dress up. That somehow puts me in work mode. These are some personal hacks but by the time we are out of this, some of our work practices would have changed irretrievably.