Reimagining the Good Times - Start-ups and the Covid-19 Crisis

In recent years, the start-up ecosystem in India has emerged as a reckoning force, largely due to efforts of stakeholders and initiatives implemented by the government to facilitate growth. Investments in start-ups surged from $550 million in 2010 to $14.5 billion in 2019.[1]

The Covid-19 pandemic has now adversely impacted the overall investment climate. While businesses across sectors have felt repercussions of the Covid-19 pandemic, start-ups have been particularly vulnerable and are facing formidable challenges both from a business and operations perspective. Most start-ups have witnessed a decline in supply/demand, except those engaged in supply/delivery of ‘essential services’ and edu-tech/gaming/streaming services. However, despite this increased demand, glitches in the supply chain network have presented challenges. The start-up ecosystem has been striving to adapt to the present situation by focussing on the need to innovate and diversify.

Guidance and notes:

Sequoia Capital, in a note titled Coronavirus: The Black Swan of 2020, issued to its portfolio company founders and CEOs, highlighted the need to be ‘adaptable’ to survive the downturn.[2] The note highlighted the need to question every assumption about one’s business pertaining to cashflow, fund-raising, sales forecasts, marketing, headcount and capital spending.

Similarly, a group of ten leading venture capitalists have issued a guide titled Best Practices for Founders in the wake of Covid-19[3] providing advice on various aspects including fund-raising, company restructuring, business continuity, and redesigning business processes. The guide prescribes that the priorities of companies should be – “employee safety first, business continuity second, and liquidity and runway a key third.” The guide also stipulates the need to keep abreast of government directions and seek legal advice when necessary.

Brace for impact:

Data suggests that the value of investments in India have fallen from $1.73 billion in March 2019 to $0.33 billion in March 2020, indicating a fall of nearly 81.1%.[4] There has also been a 50% fall in the number of companies funded – from 136 firms in March 2019 to 69 firms in March 2020.[5] Sources also suggest that between mid-February and March-end this year, investors have pulled back from closing current funding rounds.[6] Thus, sourcing funds has become a major challenge for start-ups, resulting in cash flow problems for many.[7]

With the lock-down impacting daily business operations, start-ups have been forced into preparing contingency plans to limit workforce and cutting down employee salaries. Various start-up founders have also taken pay-cuts to limit losses.[8]

Regulatory changes and start-up responses:

Recognising the financial and operational challenges being faced by start-ups, the Small Industries Development Bank of India (“SIDBI”) (which also operates as the implementing agency for the Fund of Funds for start-ups) promulgated a ‘Covid-19 Start-up Assistance Scheme (“Scheme”) to provide assistance to certain eligible start-ups that have demonstrated the ability to implement innovative measures to ensure business continuity during the Covid-19 crisis, and ensured employee safety and financial stability.

Eligibility criteria under the Scheme include start-ups that:

  • have received funding through SEBI registered alternate investment funds or VC/PE/Angel funds investing in start-ups;
  • have a positive net worth;
  • are EBITDA positive in December 2019 or, project a positive EBITDA for the quarter ending June 2020;
  • have a minimum turnover between INR 20-60 crore (FY 2019 and FY 2020);
  • have at least 50 employees;
  • have been incorporated for less than ten years; and
  • meet the requirement of the promoters/founders of the start-up having invested their own capital in the business.

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

The Ministry of Corporate Affairs (“MCA”) has also provided temporary relaxations to all corporates for compliances under the Companies Act, 2013. These include: (i) waiver of additional fees on late filings made with the MCA; (ii) relaxations pertaining to the holding of board meetings with 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.

Further, vide its notification dated March 24, 2020, the MCA has increased the threshold for default for initiating corporate insolvency from INR 1 lakh to INR 1 crore. The Reserve Bank of India has also drawn up a ‘Covid-19 regulatory package’ aimed at reducing the burden of debt-servicing and easing working-capital requirements, pursuant to which lending institutions are permitted to grant a moratorium of three-months (from March to May) on payment of instalments on loans outstanding as of March 1, 2020. Furthermore, timelines for the filing of certain income tax and GST returns have also been extended.

The relaxations introduced by regulatory bodies aim to ease the financial burden of corporates, including start-ups and facilitate their day-to-day business operations.

However, in a letter dated March 30, 2020 addressed to the Finance Ministry by various stakeholders of the start-up community, requests have been made to the government to provide further benefits to start-ups including:

  • reimbursement of 50% of the salary bills and contract wage bills paid by start-ups from April to September 2020;
  • establishing unique credit models, such as providing loans with low interest rates against the GST/IT refunds; deferral of interest payments and access to quick short-term loans; and
  • provision of expedited refunds for IT/GST returns filed.

Start-ups have also requested SIDBI to review the Scheme by easing the eligibility criteria and providing further relaxations. Requests have also been made to SIDBI expedite the transfer of funds from the ‘Funds of Funds’ to support start-ups.

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

The future:

Given the global scale of Covid-19 pandemic and the uncertain economic situation, there is a likelihood that fundraising will become a significant challenge, as investors may choose to focus their fund deployments on their existing portfolio companies to ensure that they are able to tide over this global crisis, resulting in limited funds being available for new start-up investments.

Additionally, restrictions imposed by the Department for Promotion of Industry and Internal Trade vide the Press Note 3 of 2020 (“Press Note”) on April 17, 2020 will also delay or disincentivise a large number of strategic and financial investors from China such as, Alibaba Group, Tencent Holdings, SAIF Partners, Fosun etc. from investing in Indian start-ups even though these investors have a history of funding Indian start-ups, including various unicorns.[9] Pursuant to the Press Note, fresh funding from new investors, as well as additional funding from existing investors will require prior approval from the government.

India has historically been heavily reliant on foreign direct investment to fund and sustain growth opportunities and thus, an assessment of the impact of the Press Note will be particularly crucial in the post-Covid era as open and free markets will be key towards ensuring steady investment flow and job creation. While the Press Note has been formulated to prevent opportunistic takeovers/acquisitions, it would be critical to examine the notifications issued thereunder to assess the extent of scrutiny that Chinese funds/companies investing in India will be subject to, and also whether any carve outs would be applicable.

Start-ups are likely to witness heavy negotiations on deal valuations as new investors may demand bargains or discounts in value, resulting in potential delays in deal execution and closing. Investors will also adopt a more cautious approach towards funding and insist on thorough diligence (both commercial and legal) of the start-ups’ business prospects, including contingency plans implemented during the Covid-19 crisis to ascertain sustainability of the start-up in the long run.


While regulatory measures that have been introduced will temporarily assist start-ups to deal with ‘business continuity issues’ and limit expenses arising on account of statutory breaches, stakeholders within the industry have demanded ‘fiscal’ support, viz. access to cash-flows and capital. The Scheme does alleviate some concerns amongst start-ups but the stringent eligibility criteria may result in exclusion of a large segment of start-ups.

Countries such as the UK and France have announced relief packages for start-ups, measures implemented include establishing funds to invest in start-ups as well as providing loans/financial assistance.[10]  India may also consider implementing a comprehensive and formal relief scheme that provides access to capital by either identifying/providing funding sources or financial assistance, while also establishing an effective monitoring system to assess the utilisation of funds. Start-ups play an important role in encouraging innovation amongst home-grown entrepreneurs and generating employment opportunities. Given the vast potential demonstrated by start-ups, swift and effective action by regulatory authorities will be crucial in shaping the future of the Indian start-up ecosystem.

*The authors would like to thank Associates Aishwaria Ramanan and Saniya Mirani for their assistance

[1] Peerzada Abrar, “Indian start-ups raised a record $14.5 bn in 1185 funding rounds this year”, Business Standard, Available at: (December 2019), Last Accessed on: April 21, 2020.  

[2]  Team Sequoia, “Coronavirus: The Black Swan of 2020”, Available at:, (March 2020), Last Accessed on: April 21, 2020.

[3] Accel, Bessemer Venture Partners, Chiratae Ventures, Kalaari Capital, Lightspeed, Matrix Partners India, Nexus Venture Partners, Omidyar Network India, SAIF Partners, Sequoia Capital India, “Best Practices for Founders in the wake of COVID-19”, Available at:, (April 2020) Last Accessed on: April 21, 2020. 

[4] Annapurani V, “Investments in Indian start-ups crash nearly 81% in March y-o-y”, Business Line, Available at:, (March 2020) Last Accessed on: April 21, 2020.

[5] Ibid.  

[6] Asmita Dey, “Funding for e-commerce could slow to a trickle”, Financial Express, Available at:, (April 2020) Last Accessed on: April 21, 2020.  

[7] Madhurima Nandy, “Startups face slump in sales for the first time amid lockdown”, Livemint, Available at:, (April 2020) Last Accessed on: April 21, 2020.

[8] Bhumika Khatri,“Covid-19 Effect: Indian Unicorns, Tech Startups Resort To Layoffs And Pay Cuts For Survival”, Inc42, Available at: (April 2020), Last Accessed on April 21, 2020. 

[9] Amit Bhandari Aashna Agarwal, “China’s strategic tech depth in India”, Gateway House: Indian Council on Global Relations, Available at:, (November 2019) Last Accessed on: April 21, 2020.  

[10] “UK Government rolls out £1.25 billion startup support package”, Finextra, Available at:, (April 2020) Last Accessed on: April 22, 2020; Chris O’Brien, “France creates $4.3 billion coronavirus relief program to save struggling startups”,  Venturebeat, Available at:, (March 2020) Last Accessed on: April 22, 2020.