The pandemic has impacted businesses differently and startups are particularly vulnerable.
In late December 2019, a new Coronavirus was reported to have started spreading from the city of Wuhan to other parts of China. Soon after, the virus had engulfed the whole of China, where industrial production fell by more than 13.5% in the first two months of 2020.
Today, there is not a single country in the world which is not affected by the disease caused by that novel coronavirus i.e. COVID-19.
The crisis has caused a radical reduction in international trade. The World Trade Organization estimates that even as China is moving back toward normalcy, the disruption there could reduce global exports by $50 billion in 2020. The notion that we can go back to normal right after lifting the restrictions will be very unrealistic.
There is no doubt that we will be out of this darkness soon. So, we can start to visualize how the economic landscape will change, especially for startups. However, even as we prepare to move out of the current situation, no one can argue the fact that businesses will not operate exactly as they did before the crisis; they will have to adapt to the ‘new normal’. Budding entrepreneurs and startups that are still struggling with keeping the business afloat will need to adjust their sails for the new business environment that includes COVID-19 as an all-encompassing fact.
In the short-term, we do have some winners and losers. Teleconferencing, home delivery, home exercise, distance education, streaming entertainment, eSports are all winners. The losers can include traditional retail, travel and transportation, hotels, restaurants, live sports and music. Working from home has been shown to work and the transition to digitalization of “everything” has been dramatically accelerated.
COVID-19 will increase the time required for entrepreneurs to get to cash flow breakeven by six to 12 months. Even though investment firms are increasing allocating funds to the portfolio companies, the situation for raising venture capital (VC) is expected to improve in the second half of 2020 as VC funds have to invest within a four year investment cycle. With this, there are large sums of cash with investors to deploy and less time to do it.
As they say “Every storm is followed by a rainbow”, similarly, for entrepreneurs there are a few challenges that, if handled properly, can help their startups get out of the crisis triumphantly.
The leading issue most entrepreneurs face is cash management. According to several estimates a vaccine for the disease is likely to take 12 to 18 months until approval, though the effects of the crisis may continue for much longer. In such a situation, businesses need to prepare for more lockdowns. Preserving cash for those days is crucial.
Also, the investments market has also shifted. Startup valuations are significantly down. In such an environment getting cash into the business is, and will remain, difficult. Even for those operating in high demand sectors (like healthcare), if the product-market fit is expected to be more than one year away, investors will act more cautiously.
On a positive note, entrepreneurs who have less cash are less likely to be distracted from their goals and can focus on evolving their core business model instead of engaging too much in side-shows. For the next 18 months, the goal is to make sure they can stay afloat.
Valuations will change
Entrepreneurs need to be realistic with their expectations. The stock market has already crashed, but it may go down even further. With this, investors have become more conservative with startup valuations. Attracting funding is harder and startups trying to raise money will likely lose even more equity. One certainty for investors is that their expected returns in times of crisis are often much higher than in normal days. So, it may be worth waiting until the market has cleared the impact of the pandemic before raising money again.
Leadership is more complex
Honesty about the situation is a key to creating and maintaining trust between the leadership and employees. Handling emotions is as important as showing empathy and ensuring people feel connected. Staying true to your values and vision is important.
Being forced to let go of key employees can be a distressing experience. The labor market for top talent is still active. As the crisis has affected some companies while others are thriving, losing top talent can mean that they will find a good opportunity somewhere else and not come back after the crisis is over.
This also means that entrepreneurs need to act more strategically with cash management for the next year.
Space needs are now different
For startups, strong personal and social exchanges are vital to stimulate creativity and experimentation. Fewer opportunities for co-working, direct communication and unprompted encounters might jeopardize growth. However, virtual meetings are particularly effective for strengthening existing social ties and taking advantage of this transformation will help startups emerge more strengthened from the crisis.
When there are no face to face meetings, it helps to compensate through extra communication and full transparency. Email follow ups and catchup calls after meetings can make next steps clearer. When all interactions are moved into digital channels, it doesn’t hurt to over-communicate so that everyone is on the same page.
Pivoting is the way forward
During these changing times, one of the success factors for startups has been pivoting the business model. Startups in different sectors are altering the way they offer value to different groups of customers. Entrepreneurs need to think about keeping existing customers, but at the same time offering value to new customers with possibly diverse characteristics.
Another consideration can be collaborating with matching rivals and exploring the possibility of combining resources to launch new products that may have a greater demand. There have been 3D printers reused for PPE and breweries producing hand sanitizers.
Responsible management practices and fair stakeholder treatment are particularly visible during a crisis. Also important to remember is that, while startup failures may surge, a crisis like this can also radically open up the competitive scene to those who are determined to stand their ground. As Dane Stangler wrote, about half of Fortune 500 companies started during a recession or bear market.
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