Fat cat VCs and start-ups raising thousands of crores beg for “relief package” from government to ‘survive’ COVID-19

Around mid-March before the lockdown started, about more than 30 venture capitalists and start up founders came together, signed and sent a ‘document of recommendations’ to the Government of India encouraging and supporting a lockdown in the country to fight against COVID-19.

Then in a joint letter to the Prime Minister Narendra Modi (written on 30th March), startups, venture capitalists and industry associations requested the government to fund 50% of their workforce’s salaries for six months, provide interest-free loans from banks, waive rent for three months and offer tax benefits among other things.

Startups, VCs in India request ‘relief package’ from the government to fight coronavirus disruption https://t.co/3IY3uQUEXc by @refsrc pic.twitter.com/T2RqDL3f0v — TechCrunch (@TechCrunch) April 10, 2020

Startups are also seeking interest free loans against Income Tax and GST refunds, payable upon the receipt of the refund from CBDT or CBIC. They have also sought deferral of interest payment by one year and quick approval and disbursal of soft-loans to mitigate the effects of COVID crisis on businesses and job losses.

Meanwhile, huge fund raises…

However, ironically, while startups, usually funded by fat cat private equity and angel investors, are crying for government support, a bunch of them have raised funds in the last couple of weeks.

#StartupsVsCovid19: Startups Need To Look At Mergers, ESOPs To Ease Cost-Cutting Burden, Says Mohandas Pai https://t.co/pUbmb65L2m — Mohandas Pai (@TVMohandasPai) April 8, 2020

In this month, Sachin Bansal put in over Rs3,000 crore in Navi Technologies, Reliance pumped Rs500 crore in Embibe while BigBasket raised a $50 million-plus bridge round. Rebel foods which runs food brands such as Faasos, has scooped up $50 million from Coatue PE Asia in series E round.

Here are a few other funding stories:

• Mumbai-based SugarBox, a platform that enables access to several apps through a local Wi-Fi network without depending on internet connectivity, has secured Rs 522 crore in a fresh funding round from its existing investor Zee Entertainment Enterprise Limited (ZEEL).

• Bengaluru based food delivery major Swiggy has added $43 million more in its ongoing Series I round led by Chinese tech giant Tencent. New investors Ark Impact, Korea Investment Partners, Samsung Ventures and Mirae Asset Capital Markets have also participated in the round. Last month Swiggy had raised Rs 805 crore ($113 million) from Naspers, Hadley Harbour Master Investments and Meituan. The size of the round now stands at $156 million and now Swiggy has been valued at about $3.65 billion.

• Its arch-rival Zomato has also come closer to Swiggy in terms of valuation. The Gurugram-based firm has crossed the $3.25 billion valuation mark after a recent capital infusion from Scotland-based Pacific Horizon Investment Trust.

• Digital insurance aggregator Coverfox has received Rs 30 crore as a fresh infusion from parent Glitterbug Technologies.

• Omnichannel lifestyle retailer Nykaa has raised Rs 100 crore from its existing investor Steadview Capital as a primary investment. While the fresh funding was raised on March 24, the company has suspended its operations temporarily due to COVID-19 lockdown. The company has informed vendors and partners to expect a delay in payments as the business has been disrupted during the lockdown. The company cited low income and cash flow while expenses remain constant, the Mumbai-based company has sent a letter to its vendors.

But VCs and startups are out with a begging bowl

How does this square with the jointly-written letter which says: "Covid crisis threatens to destroy all of the progress and future potential of our startup ecosystem in a few short months. Unfortunately, our startup companies across the nation are inherently young, less resilient, and most vulnerable. Many of them face likely devastation during this extraordinary economic downturn".

Among those who have signed the letter include Mohit Bhatnagar, Managing Director at Sequoia Capital (which is in advanced stages to close a fresh deal of $1.3 billion fund for India and Southeast Asia), members of CII startup council, iSPRIT, IVCA, Indian Angel Network, venture investors such as Mohandas Pai of Aarin capital, Accel, Blume, Chiratae, 3one4capital and founders of start-ups like Rahul Garg (Moglix), Aloke Bajpai(ixigo), Amod Malviya (Udaan) Gaurav Agarwal of online medicine store 1mg, Debjani Ghosh from Nasscom, Karthik Reddy of Blume Ventures, Anand Lunia of India Quotient, Deepinder Goyal of Zomato, and Sriharsha Majety of Swiggy have also signed.

I guess this is what happens when you allow irrelevant or compromised lobbies like CII, TiE, Nasscom and iSpirt to act as the voice of Indian startups in general — Sumanth Raghavendra (@sumanthr) April 10, 2020

Some prominent startup founders and VCs including Vijay Shekhar Sharma of Paytm, and Ritesh Agarwal of Oyo, have also held a meeting with Piyush Goyal, the commerce minister in India, for a similar relief.

Earlier this week, Small Industries Development Bank of India (SIDBI) launched a ‘COVID-19 Startup Assistance Scheme’ to provide working capital loans to growth-stage startups. The financial institution which conventionally specializes in equity fund investments only would be extending credit to startups for the first time.

SIDBI has restricted loan amounts to Rs 2 crore per startup with loan terms extending up to 36 months including an utmost moratorium period of 12 months. This loan can be considered against the firms’ GST refund and the proceeds can be used for various working capital requirements including salaries or wages, rent, administrative expenses and payment to vendors.

The clamour for a bailout for startups is sadly increasingly growing. Separately in a video conference with Commerce and Industry Minister Piyush Goyal on Thursday, many delegates from startups like Zomato, Curefitm, Naukri and MakeMyTrip raised issues that they are facing like a liquidity crunch, lower cash flow, lower revenue and non-availability of workers in running their ventures due to the lockdown.

Mr Goyal in turn applauded them on the launch of the Action COVID-19 Team, which promises to provide seed fund to over 50 initiatives through grants via a Rs 100-crore fund.

As on 10 th April, The Action Covid Team Grants, which is possibly a first-of-its-kind initiative globally, has already received about 75% of its target corpus. Any startup working on a scalable solution can send proposals through actgrants.in . The corpus does not have a strict deadline and it will be disbursed in the span of two to four months. Initially, the fund will invest around Rs25 lakh to Rs1 crore, depending on the need. Once, the startup scales up, ACT will double down the grants.

Mr Goyal noted after the video conference “Many of the ventures are in the final stage of launch and others will require some more time to take shape. These ventures will require access, funding, validation, scaling-up, and support. A joint committee from various Government departments and industry associations are evaluating these initiatives”

Roundly criticised

This begging (list of demands) for a bailout has been rightly criticized by a lot of people.

“I can’t fathom how such a list gets made in a country of more than a billion people who are facing a crisis unlike any they’ve seen before. A significant majority of them daily wage earners who have no financial cushion or any idea where their next meal is going to come from. Let’s not even stray into health and the need for medical emergencies; just putting three square meals on the table a day is proving to be impossible for so many,” wrote Ashish K. Mishra in a column on The Morning Context.

“At this very moment, it is they who need the government’s support. Not fat cats with bloated, middling business models and venture capital funds whose begging bowls are now seemingly larger than their risk appetite,” he added.

Here is what a few people had to say about this on Twitter.

The problem in this country is that startups think of themselves as a privileged class entitled to all kind of incentives/benefits. The problem is govt has heeded to a lot of their demands earlier. Why not extend the same benefits to regular MSMEs. — Amit Maheshwari (@amitm_ca) April 10, 2020

How pathetic.. why should the taxpayers pay for their burn. Business without profits are only bubbles. They are so use to cheap money. In this case if govt bails them the govt should take stake ?? — Neha Shah (@nezoxymoron) April 10, 2020

The mayhem triggered by the COVID-19 pandemic has almost affected every business sector in India. Why then should start-ups be favoured for special treatment and bail out?

Historical data tells us that 75% of startups that raise a seed round never reach a Series A (that too if we consider a 10 year bull market phase). Among the worst performing investors, 93% of companies never progress to Series A. Why then should tax payers fund the startup bail out?

The bailout has been requested by startups in other countries as well but thankfully all from the venture capitalist community do not support a bailout. Mr Robin Klein, British entrepreneur, Venture Capitalist, serial investor in a number of startups and Partner at London-based VC firm LocalGlobe wrote to say that it would be wrong on the part of the UK government to bailout startups during the COVID-19 crisis

He shared “Of all the threats that COVID -19 poses, the threat to early-stage startups is the least we should worry about. A bailout fund risks misdirecting much needed capital to the wrong part of the economy. It also creates adverse selection in a healthy and growing ecosystem.”

He added “And if we are to go down the bailout fund route, we should only consider investing tax payers money through either crowd or institutional co-investing. This would ensure that only the startups and scale ups that continue to have the backing of existing investors benefit from the state’s support. A time-limited co-investment fund, with no profit share, that returns all profits to the Exchequer and is run by experienced investors is the sort of model that could avoid the very real problem of adverse selection. But please use scarce taxpayers money in the sectors that really need it — hospitality, transport, recreation, arts and charities. Offering startups debt packages or handouts is not the way to go”.

We hope better sense prevails and taxpayer money is utilised sanely.