Reducing ad spends, pay cuts on startups’ agenda

Startups will primarily cut back on advertisement spends and office expenses, apart from renegotiating contracts and restructuring salaries to tide through the turbulence triggered by the Covid-19 outbreak. The crisis and the subsequent lockdown have dealt a body blow to most startups, many of whom have seen their turnover drastically hit in the past one month.

A survey of 274 entrepreneurs and investors conducted by 100X.VC, an early-stage fund, concluded that rationalising ad spends and office expenses were on the top of the mind of entrepreneurs to reduce burn; 36% said they would opt for salary restructuring and 19% would resort to downsizing.

“Startups which have been funded have already taken measures to contain costs, and many have deferred new expansion and hires. It is a sign of maturity we see within founders,” the report said. “Everybody realises that the bar for raising new rounds of investments have gone high.”

A number of startups, including some well-capitalised ones, have either laid off employees or initiated pay cuts to absorb the loss of revenues. For instance OYO, Acko, Bounce, Vogo, Droom, Homelane, Meesho, and Travel Triangle, among others, have reportedly either laid off, put people on furlough, or implemented pay cuts.

According to the survey, 66% of the founders polled are in the middle of a fundraising activity. Raising funds, evidently, has become difficult in such times, both in terms of availability as well as the time taken to close rounds. About 45% of the founders polled said the process of closing a round had slowed, while 10% said VCs aren’t responding at all.

A clutch of venture capital firms recently came together to warn such startups, which have been aggressively investing in expansion, of an impending slowdown in funding and reorient their businesses accordingly.

“Assumptions from bull-market financings or even from a few weeks ago do not apply…valuation multiples will be reset. This is because many investors perceive there is much more macro risk today and public markets are now valuing companies differently than a few weeks ago,” said a note jointly put out by Accel, SAIF Partners, Sequoia Capital India, Matrix Partners India, Nexus Venture Partners, Omidyar Network India, Chiratae Ventures, Kalaari Capital, Bessemer Venture Partners, and Lightspeed.

According to the 100X.VC, about three-fourths of the investors polled said that entrepreneurs are asking for a lower valuation in line with market sentiments.

“Investors will be wary of overpaying and will walk away from high valuation deals. Cash-rich investors will seek a bargain deal. The ₹30-crore valuation deal may be available for ₹15 crore-20 crore in three months, while the performance metrics continue to remain the same,” the report stated.

A little more than half the founders polled said either they will decrease the size of fundraising or delay the process altogether. “It would be prudent for the founders to recalibrate their fundraising in line with market conditions. The best time to engage with investors is when there is light at the end of the tunnel,” the report says.