Impact of Coronavirus on Startups/SMEs
71% Startups & SMEs faced with lower demand for products/services; most say will cut employee costs, marketing & advertising and infrastructure costs
March 19, 2020, New Delhi: The world has never seen an event of this magnitude before. Hundreds of new COVID-19 infections are being diagnosed every day from various countries and many deaths are being reported. India, with no reported community transmission, has done reasonably well so far with the number of Coronavirus positive patients at around 170, including 3 deaths and 14 cured. Worldwide, approximately 225,000 individuals have tested positive and approximately 9000 have died due to COVID-19.
State Governments and Local administrations have asked people to cancel all non-essential travels and mass gatherings. Public places like theaters, malls, schools, colleges have been shut down already. No or minimal business transactions are taking place between India and other major countries like China, USA and other European countries. Sensex is tumbling, revenues have dried up, customers are cancelling or postponing deliveries. In the middle of this outbreak, businesses, especially startups & SMEs are facing a major challenge. Many companies have asked their employees to work from home and many have temporarily suspended operations. Early stage startups, Funding dependent startups and many SMEs will soon be fighting for survival. LocalCircles conducted a survey amongst 35,000 startups, SMEs and entrepreneurs on how they plan to cope with the Coronavirus outbreak in the short term so that their businesses could recover once the restrictions are removed and the demand gets back to normal, in the long term. The survey received more than 18,000 responses.
The first question asked startups and SMEs how do they foresee Coronavirus impacting their business in the next 3 months. 30% said they foresee a decrease in demand for their products/services while 7% said they foresee facing a supply disruption or an increase in the supply cost. 41% said they foresee facing both of these issues. Only 11% said they do not see Coronavirus impacting their business in the near future.
Business Impact of Coronavirus: 48% Indian Startups & SMEs facing supply disruption/increase in costs while 71% are facing lower demand for their products/services due to Coronavirus
Many states have ordered malls, movie theatres, restaurants, clubs, swimming pools etc. to be shut, which means that the earnings for all of them including the staff that works there, has come to a standstill. Businesses are also postponing all non-essential expenses like renovations, team outings, advertising etc. to reduce costs.
When startups and SMEs were asked how they are planning to deal with the negative impact of Coronavirus on their business, 14% said they will cut discretionary expenses and 3% said they will cut or exit non-essential supplier project. 17% said they will do both. 26% said they will cut discretionary expenses, cut or exit non-essential supplier projects as well as reduce employee costs. Another 3% said they will cut non-essential expenditure as well as reduce employee costs. 37% said they do not see Coronavirus having any negative impact on their business and do not plan to cut costs.
Business Impact of Coronavirus: 63% Indian Startups & SMEs say they will cut costs; Considering lowering employee costs, discretionary expenses and exiting non essential supplier projects
The travel sector has been the worst hit with millions of Indians cancelling their summer travel plans. Many airlines have cancelled flights and grounding aircrafts, incurring millions of dollars in losses. Many small-time travel agents, tour operators and taxi/cab companies are also facing the brunt of COVID-19 as people decide not to travel. Industry analysts are predicting 80% of airlines going bankrupt by end of May.
Some startups and SMEs have reported the exercise of Force Majeure clause by their customers and getting out of a contract. Others are reporting postponement of deliveries by Indian and global customers. Some SME exporters have reported being unable to find containers to ship as they are stuck at ports around the world.
The next question asked startups and SMEs what is the primary way they plan to reduce the employee costs for their business to cope with the Coronavirus slowdown. 11% startups & SMEs said they are looking at giving unpaid leave via forced shutdown of operations for sometime while 17% said they will be freezing the incentives and benefits for this year. 6% said they would be freezing yearly appraisals and 6% said they are considering partial salary deferment for some or all employees. 17% said they will reduce headcount based on performance while 11% were unsure about how they would cope up. 32% said there has been no negative impact on their business due to the Coronavirus outbreak.
Business Impact of Coronavirus: Highest number of Startups & SMEs looking at performance based headcount reduction and freezing of incentives and benefits
Startups and SMEs were also asked in what other ways were they looking at reducing their expenses to cope up with the Coronavirus slowdown. 4% said they are considering reducing their office rentals or workspace costs, 7% are considering lowering their operation/technology infrastructure costs while 4% are considering lowering their spend on marketing and advertisements. 11% said they would reduce both their operations as well as marketing & advertising expenditure, while 7% said they would reduce both office rentals and marketing/advertising expenses. 30% said they would reduce their expenses on all the 3 areas – office rentals, operations as well as marketing/advertising expenses. 37% said they will not take any cost cutting measures as their business has not been impacted at all.
Business Impact of Coronavirus: Highest number of Startups & SMEs considering lowering spending on marketing and advertising and operations/technology Infrastructure followed by rental/workspace costs
As many startups and SMEs go back to the drawing board to optimise costs, the venture funding for startups is expected to dry up as people are unable to travel to evaluate opportunities, seek or deploy capital. Soon, it is expected that the startups and SMEs will be seeking Government assistance. World over, the US Government has announced a $50 Billion package for small business. The UK chancellor has also announced a business bailout of 350 billion pounds via business loans.
What remains to be seen is what are the kind of measures Government of India will announce to assist startups and SMEs. LocalCircles will share this report with the relevant stakeholders in the Central Government requesting timely action.