Reality check for start-ups in the post-pandemic period

There is no denying that today the Indian start-ups have left a mark on the global start-up ecosystem. India got its 100th Unicorn earlier in May with neobanking fintech portal, Open, raising fresh capital to push up its value over a billion dollars. With 44 Unicorns in 2021, the milestone of the 100th Unicorn was not a big surprise. In fact, even amid the lockdowns during the peak Covid period, when the economy and businesses were at a standstill, India saw the rise of several start-ups, with many attaining Unicorn status.

However, as the start-up ecosystem catapults its journey to greater heights and media filled with start-up news, it is time to retrospect the challenges faced by them.

As Karan Taurani, senior analyst at Elara Capital, explained, “Times are now changing. There is an on-ground reality check in terms of business models that can become profitable five years out the line versus business models that cannot become profitable even in the next 10 years. Unit economics is a very important matrice to track these start-up types of businesses, and after the pandemic, of course, there has been a massive reversible trend in terms of online to offline, which is having a negative impact on unit economics for many of these businesses. They are trying to reach the operations.”

Lloyd Mathias, Business Strategist and Angel Investor, observed, “The start-up euphoria of the past few years is dipping rapidly. Data from CB Insights shows that venture funding to India-based start-ups’ dropped from $8 billion in the January-March of 2022 quarter from over $10 billion in Jan-March 2021.”

He further said that with the overall tightening of liquidity and VC funding slowing down, start-ups are under increasing pressure to focus on the bottom-line. Founders have to stay accountable to investors. For companies, profitability is the key criterion to evaluate performance by investors.

“Start-ups born during the euphoria are now getting a much needed reality check, which in the long term is a good thing. Business fundamentals are always going to be relevant and customer acquisition and growth based on unfettered cash-burn will never sustain,” Mathias added.

Many of the edtech companies have seen rounds of layoffs. Besides, there have also been curtailing marketing spends and reducing discounts because people are moving away from the online platform and discounts have been reduced. “If we do a check on the unit economics or whether the company can attain profitability or not, suddenly there is this issue where the investors are questioning the start-ups about the visibility of the profits and not just giving a high multiple, just a basic EV sale or just basis sales growth,” Taurani said, adding that it is a mixed scene – there are companies which are very strong in terms of profitability already or the ones which have the visibility to attain probability. They will continue to remain strong in the ecosystem and probably command a high multiple in terms of EV sales because there is growth coupled with part of profitability, but companies which have only growth and less or no visibility for profits will see a reduced multiple or discount in terms of their valuation.

Highlighting some of the challenges faced by the start-ups, Anup Sharma, Independent Strategic Communications Consultant, said, “Starting a business is always challenging with limited resources, fierce competition and other teething challenges.” According to him, effective and sustained PR efforts can supplement and support the other initiatives besides creating awareness and build trust and reputation.

Rejiging Operations

Taurani affirmed that there is definitely a rethinking happening in terms of marketing for the start-ups.

Mathias noted that many founders are re-looking at their cost structures and shutting down non-core verticals. Many are also relooking their fixed costs – right from office space and manpower. Understandably, advertising marketing spends are also being cut.

“Typically start-ups closely monitor their spend plans versus the money they have, given their burn rate. With liquidity tightening all around, this runaway is becoming shorter. The founders are actively relooking at all elements of their spend lines,” he added.

Speaking on the competition factor, Taurani noted, “There is again safe competition. One would be from the larger super apps like Jio and Tata, who are entering this business, so we already have two super apps. The addition of two more super apps will undoubtedly have an impact on the business model, volume numbers, and matrix of the existing apps in the ecosystem. The competitive intensity is definitely increasing, and these two companies have deep pockets and expertise in various segments ranging from retail to grocery to consumer-led goods.”

The PR Factor

While it is important for start-ups to be in the news, but PR is not about announcements and milestones. It’s an ongoing and continual process which goes a long way to position the brand and later protect, enhance and build reputations.

Anup Sharma emphasised that most of the start-ups need very strategic PR during their fundraising stage. “For start-ups, resources are a big challenge and with limited budgets PR becomes a cost-effective tool to engage with the stakeholders and the broader marketplace to push their business to the next level.”

Sharma pointed out, “While the start-up economy boomed in 2021 and India attracted huge investments, with falling valuations the investor sentiment is slowing down and the competition for funding/ venture capital is getting extremely fierce. The investors are looking for founders with a big vision, skills to solve a problem and plan to scale the business. In the initial stage the investors are buying into the founders and their story – a clear, compelling story. The start-up has to be visible to investors in the right platforms and be seen as leaders or potential leaders in their field – not just another cohort looking for capital.”

In a start-up journey, the most critical phase is the beginning, said Kunal Kishore Sinha, Co-Founder, Value 360 Communication. He added, “PR can help build the right set of conversation around a brand in its initial phase, using right content strategy which enables start-ups to navigate media even in absence any announcement.”

Sinha further said that the start-up’s PR partner needs to have a firm finger on the industry’s pulse to help the company capitalise on the existing opportunities by rolling out compelling content that appeals to different stakeholders within the category. “Simply put, the business landscape and seamless integration of a start-up within the larger conversation will sustainably drive the initial momentum,” he added.