The World As We See It

May 2020


The global economy has been hit hard with the ongoing pandemic. COVID-19 has implications for global health and wellness, economy, and businesses. Global growth expectations have fallen off a cliff - from a 3.3% growth predicted for the year by IMF in their January 2020 publication, they have swiftly changed to it a negative 3% prediction. While the recession started in the real economy with forced lockdowns and production halts, it has quickly spread to the financial world causing significant liquidity constraints. Governments globally have taken unprecedented steps to manage the situation and are on an unprecedented easing path. IMF estimates that fiscal measures of over US$9 trillion have been rolled out so far and much more is to come. All we can say for sure about the current situation is that 'this too shall pass'.


On March 24, India went into a complete lockdown till May 17 after which the country is opening up, in tranches and baby steps, even as a number of states remain shut until at least May 31. In our estimate, over 60% of the economy has come to a grinding halt leading to serious economic and social pain to its workforce, 80% of which is in the informal sector, and a majority of these being daily wage earners. RBI and the government have announced a string of measures to allay this pain but it remains to be seen how this trickles down to the common man. There has been an array of long term reforms announced across sectors, most notably agriculture, coal and defence, that have the potential to change the landscape as things get back to normalcy. However, for the most part the economy is not yet open for business even as social lives of migrants and the lower strata of society are facing a total upheaval. Given that 60% of India's GDP is dependent on private consumption, implications for GDP de-growth are significant and hinge not only on when the lockdown is lifted but also on the probability of a second surge in reported infections. On ground efforts to manage the spread of the COVID-19 virus have been exemplary and this has helped control what could have been a major disaster in terms of lives lost. However, as we step out of this lockdown, the economic costs will become a bit clearer. 

Startup Ecosystem

We have been sharing our thoughts on the ecosystem and indicating a consolidation of sorts that was underway since last year. The current COVID-19 episode has brought economic and investment activity to a grinding halt. Investors and entrepreneurs are trying to adjust their mental models and future outlook before they think of business being 'as usual'. Even though the pandemic became a reality for India, with the initiation of the virus spread, sometime in March, it had already unleashed itself in much of the developed world. Given its impact on fund flows, the average deal value in the early stage ecosystem for the quarter ended March fell 27% (from US$ 17.3 million to US$ 12.6 million) compared to the previous quarter. The March quarter also witnessed capital infusion into early-stage businesses fall by a resounding 50% (from US$ 5.4 billion to US$ 2.7 billion) while the number of startups that received funding decreased 31% (from 311 to 214). While March brought in the pandemic uncertainty, deal activity fell off a cliff in April, declining 73% to US$ 881 million.

The early-stage ecosystem has already started shaking with reverberations felt in the overall macro situation. There are widespread reports on companies running out of cash, salary cuts, job losses, and business model realignments. NASSCOM recently released the Startup Pulse Survey (Q1 2020) and we thought to share some relevant numbers from the report. Due to the pandemic, ~90% of the startups have seen revenues decline while 40% are looking to shut down operations. Reducing marketing spends (65%), pay cuts (53%), switching to low cost vendors (24%) and employee right sizing (13%) are some of the measures startups have undertaken to extend their runways. Unfortunately, this may not be enough, as ~70% of the startups have cash runways of less than three months. The government has come forth with measures including a loan program offered to SMEs and startups via SIDBI while the VC community has pooled in some funds to support their holdings as well. As investors and entrepreneurs try to gather their wits and form an opinion on how the future appears to them, we anticipate both the number of deals and the amount invested to show a dip in the current and upcoming quarter. 

As a side note, Equanimity has been following India’s innovation story for quite some time now and we would like to share that the Global Innovation Policy Center recently came out with the 2020 edition of their International IP Index. At first glance, the drop in India’s position from 36 to 40 (out of 53 countries) may be disheartening but on peeling the onion, we found that India’s score increased from 36.04% (16.22 out of 45) to 38.46% (19.23 out of 50), resulting in a 2.42% jump on an absolute basis and 6.71% on a relative basis. The jump in scores came primarily due to investments in the regulatory infrastructure surrounding intellectual property and systemic efficiency. While there are many areas of improvement, we are optimistic about the direction of innovation in this country and are cheering on as the innovators lead India through a journey of exponential growth.