Coronavirus: the economic downturn & startup world
As we enter the recession territory and investors become more cautious, the startup world is more uncertain than ever before. IMF says that the coronavirus economic impact will be about as severe as the great recession.
Simultaneously, the coronavirus pandemic has affected more than 500,000 people around the world. This has caused governments to take preventive measures, especially in the current virus epicentre i.e. Europe where most countries are now enforcing border controls, imposing lockdowns and declaring an emergency. Amid all this, numerous companies including Apple and Nvidia have reported a stark decrease in sales and other organisations such as Scandinavian Airlines and Marriott International lay off tens of thousands of their employees.
These economic impacts are due to the disruption in demand in certain industries like tourism, retail and mobility due to facility closures, quarantines and travel restrictions. So how are startups implicated?
What problems are startups bound to face?
First, startup teams should brace for a decrease in staff productivity. Startups are heavily reliant on a small number of key people that often occupy cross-functional roles. However, the current crisis is such that it means the diversion of attention for most people due to the need to attend to personal situations that have emerged (such as family caregiving, healthcare issues, or household concerns). Moreover, the constantly changing situation of the world is able to keep the attention of most individuals resulting in a cumulative impact over the days, weeks and months of the outbreak.
Startups operating through lean organizational structures may not have sufficient liquidity to navigate through frequent absences, lack of productivity during remote working, or additional utilization of benefits by employees.
Moreover, turmoil in supply chains can result in significant consequences for startups in all sectors including technology and healthcare. Especially because most companies have supply chains concentrated through only a selected group of vendors. Even startups that offer services, depend on regulatory, legal and industrial collaborators for deliverables. This ‘soft’ supply chain is also bound to be affected which may result in delaying contracting, data acquisition or credentialing that is essential to the businesses. Companies reliant on customer service and administrative workflows that require on-site presence are also very vulnerable. These various forms of supply chain bottlenecks can be compromising for scalability and basic functionalities in the long term.
Startups also need to consider the impact of facility closures. Many countries have already asked businesses to close local facilities. While some businesses are able to work remotely and keep up efficiency, others face difficult challenges. Even if the government has not officially asked for facility closure in some places, businesses understand that community spread due to keeping offices open can result in more long-term damage than working remotely or temporarily shutting down.
Survival tips for Startups
Although no one can predict the future, there are some obvious tips for survival during this time.
The fundraising horizon
There are mixed opinions about the funding rounds in the coming months. According to CB Insights forecasts, funding will slow down during the next quarters with some possibilities of disinvestment. Additionally, due to the University closures, the support offered by academic accelerators and incubators will decrease to minimal if not none.
Therefore, public grants and funding from national and supranational organisations will be the most stable route to follow. However, if a startup is set on private funding, teams need to look outside the usual field of focus. Startups in Europe should start considering investment from outside of the continent and possibly Asia. It is also worth considering a sustainable model or bootstrap options if possible.
Pull the plug on high-cost hires
This is not a good time for focusing on team growth. Every startup should institute a rigorous mechanism for evaluating the need for every new position. If a startup did not hire recklessly when times were good, they are on the safer end. However, if a startup’s focus has been hiring and team growth in the last one year, there is a definite need to re-evaluate “high price, low necessity” positions. Startups can offer these team members a part-time position instead if needed. However, tough times require tough measures and while these conversations will not be easy there may be a need for lay-offs or pay cuts. Luckily, many governments around the world have introduced economic packages to help employees who would lose jobs in this crisis.
Remember, if a startup is not able to evaluate redundant positions and implement lay-offs in time this could result in an early burn-out resulting in all employees losing jobs eventually as the startup runs out of liquidity.
Expenses vs Need
Since we are talking about pulling the plug on high-cost hires, let's not forget other expenses. The silver lining in the current circumstances is that having a team work from home should be cheaper as startups save on utilities and other office space related costs. It is extremely important to do an audit on tools being used by a company and let go of anything that fits the "high price, low necessity" category. It is often seen that a two to three person startup team is spending hundreds of euros on tools which may not be entirely a neccesity. These are the times to reconsider those expensive membership fees and licences. Are there any alternate tools that are cheaper? Is the money being paid for a tool worth the value it brings? Also, not just tools, but reconsider every other expense starting from spotify subscriptions for the office to rent for the office space itself - cut down what you can.
Reconsider product-market fit
Since the world today is no longer the same as it was a couple of months ago, a startup’s product-market fit, business model and communication strategy can not remain the same. Managements quickly need to test assumptions about customers and revenue. B2B startups need to evaluate how the economic downturn will affect their target market. Startups must re-evaluate revenue forecasts, sales cycles, financial metrics, burn-rate and runway periods.
Leaders need to ask important questions such as, can my product/service be sold online? What are my new value propositions? Can my product or service offer value/benefits to a pandemic struck society? If not, can my product/service be re-positioned as a lifeboat for others to ride out the downturn?
Startups that offer software as a service (SaaS) or have digital products need to make sure that production or scaling is as lean as possible. Companies in the initial stage of product development need to consider getting an MVP with minimum requirements out in the market to start making revenue and help sustain essential costs as soon as possible.
An important element in implementing such changes is communication. Startup leaders have to be more compassionate and transparent. Communicate honestly to investors, clients and employees. Create a three month, one year and three year life-boat plan with a new product-market fit, business model and communication strategy.
Most of the world is coming to the realization that digitization in this age is more important than ever. Companies with a digital strategy in place are at an advantage as societies look towards e-learning, e-commerce and e-health. More and more companies are asking employees to work remotely which means they need to have effective strategies in place to communicate online efficiently.
If you are a startup leader that is in the product development stage, or need to be equipped with the right tools to be able to work remotely, consult with Thorgate for sincere advice on what works best for you in the upcoming economy.
Thorgate is also helping e-commerce, fintech and healthtech startups that are seeing growing opportunities and need in the current market. As most e-commerce and healthtech startups seek to scale-up, also traditional industries require digital solutions to keep startups afloat. See how Thorgate can help you!