Tech start-ups stressed in the time of Covid-19, but the big guys rake in

Neither Silicon Valley nor India tech Inc has been granted any real monetary respite by their governments. But in true start-up spirit, both are fighting it out

Countries around the world have been announcing economic relief measures to help the corporate sector tide over the devastating impact the pandemic has had on business. However, an analysis of government initiatives across the globe shows that there is hardly any benefit for the tech sector, which some argue has been less hit relatively. 

The strain is being felt alike in the United States's Silicon Valley and India’s tech ecosystem, which is largely based in Bengaluru and the National Capital Region (NCR).

India’s Rs 1.7 trillion-rupee package leaves out any benefit for tech start-ups, save for a provision under which the government will contribute towards a company's share of employee provident fund if it has a staff strength of less than 100, of which 90 per cent are earning less than Rs 15,000. Most don’t make the cut.

And in the US, the $377 billion loans (part of a $2-trillion relief plan) allocated to small businesses that employ less than 500 people, will not reach start-ups due to an “affiliate rules” clause. The clause says that all companies with minority investors have to count employees of fellow portfolio companies. This puts many venture-backed start-ups above the 500-person cut-off.

In the absence of a stimulus, start-ups are taking corrective action. Over a dozen enterprises in India have responded by introducing salary cuts. The list includes Bounce, Shuttl, Fab Hotels, Instamojo, Zomato, and HealthifyMe. In the US, layoffs are ringing from start-ups of all shapes and sizes. Electric scooter firm Bird and HR firm ZipRecruiter are among several to have laid off by the hundreds.

“Under 10 per cent are at serious risk,” said Damien Zhang, of CDH Investments, a Chinese investor. “The initial hit was to retail and services (such as restaurants) industries,” he said.

Early in March, Silicon Valley VC Sequoia sent out an open letter to its portfolio founders calling the situation the “Black Swan of 2020”. It advised firms to “brace themselves for turbulence”, conserve cash as much as possible, extend runway and prepare for supply chain disruptions. The letter also warned they could have a harder time raising funds, similar to the market downturns of 2001 and 2009.

“Extend payables, pull in receivables. You have the absolute right to ask customers to pay you. Go renegotiate rental agreements. Cut out unnecessary contracts,” said Mohit Bhatnagar, managing director, at Sequoia Capital India, on a recent conference call.

All said and done, it is interesting to note that some digital technology firms are in fact seeing an uptick.

Video conferencing, social media, online education, over-the-top video and social media are areas that are seeing massive demand. Zoom, the video-conferencing platform that has became the de-facto virtual meeting tool today, has been downloaded over 50 million times in recent weeks. Estimates suggest that traffic for Netflix, YouTube and Facebook has also surged, as people spend more time on entertainment locked up at home. A similar story is playing for Indian edu-techs such as Byju’s and Unacademy, which are calling it their “demonetisation moment” — a reference to the unexpected gains to India’s mobile payment apps during the note ban in 2016.

However, the big guys in the US are also taking advantage of the pandemic. According to a New York Times report, Uber has began reframing a long-time campaign to avoid classifying its drivers as full-time employees. Google and Facebook, on the other hand, have been lobbying with the California government to delay a privacy law that would have them share a copy with the user, of the data they collect from him.

In India too, Google and Facebook have asked for a deferment from a new digital tax, according to Reuters. Supposed to have come into force on April 1, the Indian digital tax mandated tech companies billing Indians for digital services in India to pay a 2 per cent tax on invoices.

Meanwhile, it is generally agreed that nascent tech companies are taking most of the beating, whether it is India or the US. A tech company founder in Bengaluru said, “A welcome relief would be a rebate in cloud services fee. All start-ups regardless of their service have this cost. (But) it may be unlikely to come through because the lobby of AWS, etc is quite strong.”

Start-ups, however, have drawn up a list of the follow-on measure they seek. Through Nasscom, the India tech industry group, start-ups have put measures which include rebate on rent for offices, overdraft facility from banks, waiver of payment of advance tax, one-time PF opt-out option for employees and relaxation of deadline in regulatory filings.

According to media reports, Indian government is drawing up a new relief package that will be aimed at companies and sectors most hit due to the pandemic, essentially airlines and retail.