What Indian startup founders and VCs can learn from China on battling the COVID-19 pandemic
Today, there is a strange silence in the Venture Capitalists (VCs) and investors circles across geographies. With strategists and experts warning the situation could get even more serious than the great recession, startups and enterprises are working on bare minimum expenditure. With many reporting a zero revenue, the anxiety is real. It is only natural that investments and funding have suddenly seen a screeching halt in many cases. Yet, even in such a scenario, it is interesting to note that China, the country at the centre of the COVID-19 outbreak, has begun to see a resurgence in VC activity.
To gather insights from the Chinese context, Venture Gurukool Capability Fund, in partnership with YourStory & AWS, hosted a webinar that saw VCs, entrepreneurs and experts from Shanghai and Beijing sharing their learnings, which could be ported to the Indian context to help startup ecosystem get back on its feet once the crisis abates.
The webinar saw participation from Dr. Edward Tse, Founder and CEO, Gao Feng Advisory; Leon Zhang, Partner, CDH Emerging Market Fund; David Ye, Chairman and CEO of Rong360 Jianpu Technology; Pei-Fu Hsieh, Co-Founder & CEO,; and Dipti Lavya Swain, Partner, HSA Advocates, and was moderated by Mahendra Swarup, Founder & Managing Partner, Venture Gurukool Capability Fund. Ntasha Berry, the Partner at Venture Gurukool Capability Fund and the Co founder at Venture Gurukool introduced the panelists and set the
Setting the context and tone for the webinar, Mahendra Swarup, said, “Having heard that China is bouncing back after successfully battling the COVID-19 crisis, it is only appropriate and timely to learn from China what are the key issues that we need to address and what needs to be done even as Indian startups and businesses are hustling hard to survive the crisis.”
Lessons from China on flattening the curve and the silver lining amid the pandemic
“While the pandemic was disastrous for many people and businesses, it has not been without a silver lining,” shared Dr. Edward Tse, who is also a leading global business strategist in China with more than 30 years of experience in strategy and management consulting. In his talk, he deep-dived into how China fought the pandemic and flattened its curve faster in comparison to nine other most affected countries during the same period. Highlighting some of the initiatives by the Chinese local and central government that was instrumental in battling the contingency he shared, “The Chinese local government has reduced taxes and rents for SMEs to promote the recovery of production and operations. Some of the local governments have included online healthcare as a component of health insurance. Given the fact that technology has been instrumental in battling COVID-19 and its aftermath; at the central government level, there has been an unprecedented investment on what is termed as new infrastructure - data centres, 5G networks in addition to traditional investments such as high-speed railway lines. It has also introduced multiple policies and measures to stimulate industry development.” He noted that while not everything has been perfect, one can’t take away the fact that the government has responded swiftly and aptly.”
He also shared that the pandemic had resulted in steep growth in some sectors such as those with solutions around distributed working, online education, remote diagnostics, gaming, online entertainment and fresh food delivery. Sharing statistics he noted that companies like Tencent witnessed 120 million Daily Active Users for Honor of Kings, one of its popular games, while iQIYI, China's leading online video platform, witnessed 1079 percent increase in online entertainment membership. He added that the time to come would see the evolution of new business models, opportunities in sectors such as health, automation, big data, distributed working, retail, social media, among others.
“Given how critical social media was in keeping the government and citizens connected, the time to come will see social media companies focusing on enabling G2C and C2G communications. Healthcare will see a stronger shift to prevention and early diagnostics and the next generation of smart cities will address the larger public agenda.”
A conservative approach to investing
Taking note of Dr. Edward Tse’s observation, Mahendra Swarup asked Leon Zhang, to share his perspective as an investor, if the surges seen in certain sectors primarily due to the lockdown was likely to sustain and make way for shift in consumer preferences given that India was too witnessing similar trends due to the current stringent lockdown in the country.
Leon Zhang, Partner, CDH Emerging Market Fund, one of the leading funds in China which has invested in seven portfolios in India including, etc. agreed with Dr. Edward Tse’s observation on the surges in certain sectors. He added, “While these surges are most likely temporary, there will be some fundamental shift in consumer behaviour especially with regards to online education, online grocery shopping and other secondary sectors. Consumers will now be more open to adoption and hence these sectors will now grow to the next stage.”
Answering Mahendra Swarup’s question if it is a good time for investors in India to invest in startups from sectors that are seeing a surge primarily to the very nature of the economy and market brought about by COVID-19 in India, Leon Zhang shared that while investors will keep a close tab on these startups, it is possible that they will wait and watch before making a decision.
“Now, in the Chinese startup ecosystem, there is at least certainty that things will normalise in the near future but there is a lot of ambiguity with regards to India. The country is yet to see if the crisis will grow further and what the real bottom will be. So, VCs and private equity firms will take a conversative approach to investments and will wait to allow startups to test their models, watch how they are emerging out of the tough times and will then make the decision.” He added, “At this point of time, startups in India need to have cash reserves that can last them for six months to survive given the current market situation.”
Leon expressed confidence that 90 percent of CDH investment’s portfolio startups in India are well equipped to survive the tough times. “ We have had a very detailed discussion with each of them. And we are happy about that.”
Optimisation lessons for startups
David Ye, Chairman and CEO of Rong360 Jianpu Technology, (a New York Stock Exchange listed company) and an entrepreneur and investor with 25 years of experience shared a detailed account of the steps taken by the company to battle the crisis.
With close to 1000 employees on its roll, one of the first steps that the company took was to safeguard the health and well-being of its employees. But even before that the company kept a watch on the developments and had a contingency plan ready for action. “While the pandemic peaked just right before the Chinese New Year Holiday in January, it was already evident that it was a growing concern months before. In December, we had a leadership meeting and had discussed how we could set up a remote working environment and how to keep business continuity, and how to communicate with our customers, financial partners and employees.”
So when the pandemic peaked before the holidays, the team was swiftly able to reconfigure its operations to work remotely and had the laptops sent directly to the homes of their employees.
“And, to optimise the cost, by mid March, the company swapped its office space to a less fancier but convenient and smaller office space, considering only 35 percent of its workforce was able to start coming to office. This helped to optimise the cost without having to cut jobs or teams. We also cut down on redundant hardware and moved online to the cloud.” He advised Indian startups to be prepared for a long fight and for the worst as the Coronavirus was not not going to disappear soon.
Turning the crisis into an opportunity
Next up on the discussion was Pei-Fu Hsieh, Co-Founder & CEO, Karbon Card, a corporate credit card company targeting Indian startups. Pei-Fu Hsieh shared his perspective on the change in spending among Indian startups and how Karbon is focused on growing even with the challenges on road.
Pei-Fu Hsieh shared that while January and February saw startups cutting down on travel by 40 percent, by March all startups completely stopped travel spends in March. By mid-March, with the news of the 21-day lockdown, companies were scrambling to prepare for business continuity, were busy optimising, and there was hardly any spending. By the beginning of April, companies began spending on collaboration tools like Zoom, Slack, ZenDesk,, etc. and those in gaming, edtech and few others have started spending on marketing as they are seeing an opportunity to grow.
“Gaming companies for instance, are actually taking this as an opportunity to grow 10 times because they realise that the cost of acquisition has actually declined significantly. Prior to COVID-19, the big spenders on advertising were e-commerce and Fintech, especially lending and gaming but today it is gaming and a few online education companies.”
As a company that works with Indian startups closely, Mahendra asked Pei-Fu Hsieh if Indian startups had the required cash runway to weather the market downturn brought about by COVID-19 crisis. To which the entrepreneur asserted that he believed that Indian startups were much more resilient in terms of cash runway. “A shallower domestic capital pool has actually helped to build a resilient DNA in entrepreneurs. Indian startups are known to be extremely cautious in terms of spending, scaling and burning cash compared to Chinese counterparts. Startups in India understand that because it can take sometimes at least six months to fundraise, they usually have a runway of 10 months or more. Given these conditions, I think Indian startups have cash to last much more than six months.”
Pei-Fu Hsieh shared that while Karbon was in the middle fundraising, it is now focusing its efforts on driving growth. “Because, a lot of VCs will now see how you responded to the crisis, and will see if you were able to make tough decisions, optimise or pivot and come out of the crisis stronger. If you do, you will be looked upon highly and investments will flow in.” He said that as an entrepreneur 95 percent of his time at the moment is focusing on growing the business by reaching out proactively to gaming companies, considering they are now on a spend mode to accelerate growth. “The decisions that you make today, and the things that you do today will impact how you will fundraise tomorrow.”
How the Indian Government and startups are reaching out to each other to sail through the tough times
Dipti Lavya Swain, Partner, HSA Advocates, who leads the Firm's China Desk is a specialist in Investments, Structuring, FDI Startups and Corporate Laws. He noted while 70 to 80 percent of Indian startups, SMEs and large companies have transformed into an online data room system for all their documentation needs, there will still be a hurdle to get investments considering that even if investors get to see and check the documents, the decision is likely to be made for most only after an in-person meeting which is likely to happen only after the lockdown is lifted. “But, this problem is largely temporary.”
In his segment, he highlighted how the Indian government has taken steps to build investor confidence and help startups and MSMEs sail through the tough times such as the working capital loan of up to Rs 2 crore payable in 36 months announced by Small Industries Development Bank of India (SIDBI). He also noted that there has been relaxation in terms of compliances and filings with no penalities or additional fees for delays. “The Government is also reaching out to technology startups for possible collaborations to address the current situation.” He added, “But, the brighter side has been how startups are reaching out to each other for possible collaborations, partnerships and forging new types of joint ventures to keep their businesses up and running. We are already seeing startups thinking in these directions and reach out to us.”
A long battle ahead
While the webinar gave an insider perspective on the Chinese startup ecosystem and how is springing back to life after COVID-19 lockdown and the parallels for India’s startup ecosystem and the silver lining amid the adversity, it also had one key message - Indian startups must prepare for war and take tough decisions, optimise, survive and grow.
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Venture Gurukool Capability Fund is CAT 1 AIF which invests in early stage ventures transforming the Everyday Economy, with relentless focus on capability building. We co invest in opportunities with recurring transactional revenues with proven product market fit and back strong founding teams with successful track record. We relentlessly focus on building organisation capability early and leverage the experience of our super experienced Venture Partners to scale sensibly. know more.
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