Startup learnings from China in the Wake of Covid19

Moving back to India in 2012 just as India’s 3G rollout was taking shape, Rajinder gained a ringside view into India’s digital transformation by working with the founders of some of India’s biggest unicorns today.

10 mins (+ 5 mins for the file at the end) read

21st Mar, 2020

Most founders in India know about how the Covid-19 outbreak began in China and are now beginning to think about the impact on their lives and businesses in India. The PM’s address to the nation was needed as was his announcement of the first of possibly many Janata Curfews starting this Sunday. We at Matrix wholeheartedly support these measures and strongly encourage everyone we know to stay safe.

To understand this crisis better, the team at Matrix Partners India hosted a call recently for our portfolio founders with Harry Man, Managing Director at Matrix Partners China. We heard first-hand about the impact of Covid-19 on the startup ecosystem in China and what life is currently like on the ground. We concluded the call hoping for the best, and that India doesn’t see any community transmission. However, beating Covid-19 is most likely going to take much longer than expected and through this note, our attempt is to help the startup community think through the difficult choices we have to make.

Decoding the problem:

The crux of the problem with Covid-19 is human to human and community transmission. Given the risks involved with any second wave, the Chinese Govt. has been placing tight controls on movement in all cities. These controls extend to both international travel and internal movement. Now that these restrictions on internal movement are slowly being lifted, there are more than a 100K individuals who are expected to return to Beijing alone. There is fear that a few new cases among people who were not carefully contained, could possibly lead to cases erupting and growing exponentially again. As a result, everyone in China is staying extra cautious and restricting movement. Opening up international travel while the rest of the world is seeing cases grow is also a challenge and new cases could trigger another wave. Govt’s are hence expected to remain cautious and maintain tight controls on movement. The end of this has to be marked globally and not locally. Startups in China that were predicting that the recovery would begin by April are now expecting the recovery to take at least another 3 months. For countries like India which are seeing cases grow now, companies can possibly expect the recovery to take longer, maybe 4 months. 

Impact on startups:

This crisis has had serious implications for startups in China that needed to raise capital to fund losses. Given all the uncertainty, restrictions on travel and movement, no business meetings and challenges in running a diligence process, most Chinese investors are not writing checks to new companies. Companies are expecting fundraises to be pushed out till there is clarity on economic recovery and there will likely be very few new deals in the first half of 2020. Companies that had 6 months of cash on hand going into the crisis are facing existential challenges. Companies with 12 months of cash on hand are assuming that their business will be impacted significantly for the next 6 months, after which they will start the fund-raise process with 6 months of cash runway till they close. Investors in China are strongly advising their portfolio companies to extend their runway through 2021 or at-least till June 2021 and everyone is reviewing expenses very closely. Many companies have asked their employees to convert to part-time/ flexible working hours to tide through. In some severe cases, startups have had to cut their expenses by up to 50% of peak spend levels.


With this said, there are sector-specific nuances and some industries are seeing significant growth albeit with challenges. For example:


  1. Grocery and Food: Everyone is trying to eat at home as no-one can go out and there is a demand spike. However, there is also a supply-side disruption to contend with as many part-time delivery agents have returned to their hometown to be with their families. Deliveries to customers' door-fronts have also stopped and now happen to the entry gate of compounds. Consumers have to gear up with gloves and a mask, and then walk out to the compound gate just to pick up lunch or a grocery order. Even with all these challenges, the industry is seeing 3X+ growth.
  2. E-commerce: Discretionary spending has fallen significantly and categories like beauty and fashion have been affected. Customers who are ordering are looking for a guaranteed delivery slot from e-commerce companies. Those that have tighter control over their delivery fleet and can guarantee a time slot are growing their market share. Those that don’t (e.g. Taobao) have seen an impact on customer experience and lost market share given shifting consumer preferences around delivery.
  3. Retail: People are locked down in their compounds and the retail industry has been shut for 2 months.  Coffee shops have now opened but no more than 1 person can sit at a table. Through these soft controls the Govt. ensures people stay at home. People have begun going to the supermarket 2 months after the outbreak, but footfalls are still nowhere close to normal. 60%+ of shops may be open but business is 20-30% of peak demand because consumers are still not ready to risk entering crowded spaces.
  4. Online Brands: Newer online brands have been able to take advantage because of two reasons: 1) traditional brands do not have the digital marketing know-how that is required to grow as more consumers shop online and 2) supply chain disruptions have affected larger companies more. As a result, innovative DTC brands have gained significant market share.
  5. Fintech:
    1. Lending companies have been significantly affected because in these tough times people are conserving cash or can’t repay their loans. Delinquency rates have risen and the Chinese govt. has been encouraging fintech companies and bigger state owned banks to extend loan periods for SME’s and consumers. Larger banks are able to withstand this but smaller companies may have an asset-liability mismatch and are also seeing higher delinquency rates given that they were serving customers that likely didn’t meet the bigger bank’s underwriting thresholds.
    2. Online insurance is however sky-rocketing because field-sales agents of traditional insurance companies are not able to meet customers
  6. Travel and mobility: Both sectors have seen a big impact because of the restrictions placed on movement. Now in the 3rd month after the outbreak, companies are seeing demand return to about 20% of peak demand levels. People are still wary of using public transport and facilities given concerns around health.
  7. Software: Anything related to enterprise services has seen a big jump. Dingtalk, Alibaba’s Wechat competitor focused on enterprise communication has been the #1 downloaded app for the last 2 months. Similarly, other enterprise collaboration services startups are also seeing a lot of growth
  8. Video streaming, mobile gaming, and other digital services are seeing a significant spike but people are signing up only for 2-3 months.
  9. Online education is growing really fast and the outbreak is leading to many new customers entering the category. Most users are however experiencing online for the first time and haven’t begun signing up for longer term packages as yet. But the sector does expect paid conversion to go up.


These insights from China served as thought starters for a discussion with founders in India who were broadly thinking through four kinds of issues. Multiple ideas/learnings were shared to deal with the situation. Excerpts from the discussion below:

  • Team health and safety
    • Work from home (WFH)
      • Most startups are 70-100% WFH already. Others piloting 100% WFH to be future ready
        • Tech. and other corporate functions mandatory
        • Ops / delivery / sales / collections with varying WFH policies. At the very least off-peak hours and split teams implemented
      • No use of public transport
      • Worst case planning – what if the office is inaccessible for two months
        • Access to information systems – backing up everything on cloud
        • Data security – use of VPNs
        • Re-looking at strength and reliability of Disaster Recovery systems
        • Vendor / other payouts – moving to completely digital
    • Key person risk
      • Building redundancies in the org. where possible with knowledge transfer where needed
      • Identification of key team members, including co-founders, and their mandatory isolation from each other
    • Sanitization
      • Increased sanitization efforts and cleaning in office, including disinfecting. Staff to have mandatory temperature checks
      • Equipping field workforce with pocket hand sanitizers, gloves and masks
    • Emergency response system
      • Easy availability of key info (telehealth check-up options, emergency contact numbers, details of testing centres, etc)
      • Identification of team members who can step in to tackle emergency situations – especially relevant when companies don’t have an HR team
      • Agency on standby in case an outbreak happens in your office
    • Insurance
      • Coverage of employees and their family under standard company health insurance plan or at the very least a COVID-19 specific plan
      • Income protection insurance for part-time workforce
  • Cash Flow management and scenario planning
    • Budgeting and scenarios
      • Plan for U shaped recovery – companies expecting a 20-100% drop in business over the next few weeks but planning for lower demand for longer
      • Expecting equity financing to take longer or not happen at all till full global recovery is made
      • India's startup system doesn’t operate in isolation and in fact, is dependent on external capital primarily from the US and China. Likely that Indian mid-late stage startup financing market will see a rebound only after their “home” markets rebound so even if India escapes Covid crisis, we will still have to wait for the rest of the world to figure it out
      • With all this, managing burn to ensure runway through 2021 or at-least till June 2021 is key
    • Cost and cash out-flow rationalization
      • Marketing: 50-100% cut in most cases; digital services with positive marketing RoI are increasing marketing spend as more people look for digital solutions e.g. Ed-Tech, Gaming
    • No costs are really “fixed”:
      • Rental renegotiations – proactively work with landlords
      • No new hiring
      • Co-opting team leaders in identifying payroll cost solutions – being pragmatic but humane. Examples of ideas companies are thinking about vary from salary reduction, shifting to variable pay, salary deferral or worst case headcount reduction
      • Re-looking at product roadmap – rationalizing long term projects
      • Discussing waivers and moratoriums for some expenses
      • Zero discretionary expenses
    • Working capital
      • Matching outflows to inflow cycle as much as possible; if you don’t ask for concessions, you won’t get them
      • Avoid deferred payment structures that hit as a bullet payment and take the business down – fundamental reduction in cash outflows and cash flow matching.
    • Disbursals and collections for lending companies
      • Most companies focusing 100% on collections right now and expecting NPAs to increase manifold – co-opt sales team members, identify problematic cases and offer solutions instead of “hard collections”
      • Reduction in disbursals by up-to 100% (for a few weeks at least), especially if the company has less than 12 months of runway. Calibrate growth based on early repayment data
      • Companies expecting further liquidity tightening/partnerships with banks getting delayed
  • Productivity and making remote work successful
    • Planning: daily / weekly planning cycles instead of weekly / monthly
    • Reporting: daily team huddles – morning and evening
    • Tools:
      • Communication – Slack / Flock (cheaper alternative)
      • Meetings – Zoom
      • Project/task management – Trello or other similar options
    • Employee morale:
      • Celebrating small wins in daily / weekly huddles
      • Quizzes and events on Slack - “water cooler conversation channels”, “Friday happy hours on video”
  • Opportunities in the time of adversity
    • Companies that are pre-launch – building content marketing engine, product iterations, fine-tune go-to-market plans
    • Identifying new revenue streams e.g. cross-sell new products/services to the existing base
    • Engaging suppliers and customers who will be at their homes – proactive communications, video product demos/marketing material, etc.
    • Building new products relevant for remote work, remote learning, etc – trial happening at unprecedented scale and demand will shift positively once the situation returns to normal
    • And most importantly identifying strategies to go from #2 or #3 to #1 in your industry – larger competitor as badly or worse affected and even playing field possible when market recovers


To summarise, this is a tough situation for the entire ecosystem. However, we are all in this together. Hopefully, all the efforts by the government and citizens bear fruit and we won’t have a large-scale outbreak of Covid-19 in the country. Or that scientists find a cure or vaccine soon that can save lives. Till then, let’s plan for the worst, take appropriate steps as more data becomes available even as we hope for the best. 


The team at Matrix remains optimistic long term and believes in the resilience of the ecosystem and Indian founders, and we’re trying to make sure we keep making long term investments. Stay healthy and safe!

Link to the file discussed over this call.

From L-R: Manish Patel, Tarun Davda, Harry Man, Jitendra Gupta, Raviteja Doddha, Shashank Mehta, Akhilesh Bali, Avnish Bajaj, Mayank Kukreja, Vikram Vaidyanathan and 60 others