Survival of the Fittest:

Startups and the Coronavirus Crisis

 

8th May 2020

Written by Nikhil Sinha, CEO at GSVlabs.

The Coronavirus crisis and the resulting slowdown in economic activity represent an existential threat to thousands of startups around the world. In the best of circumstances, startups face very tough odds of success -- 9 out of 10 fail within 12 months of being launched -- most because they just run out of money. With the advent of the Coronavirus crisis, investors and customers have tightened their wallets. The consequences for newly launched companies are potentially devastating, even for those with good products and services.

The startup environment has changed dramatically in just the first four months of 2020. By the end of 2019 the world was beginning to see the emergence of a global silicon valley. Technology startup activity, once highly concentrated in Silicon Valley, caught fire around the world. New tech hubs began to emerge in Shenzhen and Shanghai, Bangalore and Gurgaon, London and Paris, Boston and New York and in many other parts of the world.   The growth of global tech entrepreneurship was fueled by both the increase in, and the globalization of, venture investment. In 2018, global venture investment crossed $200 billion and, for the first time ever, more venture investment was made outside of the US than in the US.  

With startup activity and opportunity more distributed, entrepreneurial aspirations are also increasing worldwide. On average, 43% of people say they are motivated to start an entrepreneurial activity within the next 6 months motivated by opportunity and aspiration, not necessity. Entrepreneurship has already emerged as the single largest sector in many economies.

in many places these resources and support

systems are weak, nonexistent, or fragmented

Although opportunity is the driving force, it’s still difficult to be an entrepreneur. In order to thrive, startup founders need dependable resources and the support of a community to help build their network of advisors, mentors, and service providers. But in many places these resources and support systems are weak, nonexistent, or fragmented. In several sectors, digital communication and connectivity have been key to building and supporting global communities. For example, the rise of digital communities like Coursera for education, Nextdoor for neighborhoods and LinkedIn for professionals have transformed the way people connect and learn. During the Coronavirus pandemic, where physical interaction has been discouraged globally, we’ve seen the explosion of digital communication tools like Zoom and WhatsApp for both business and personal use. Digital platforms are extending their reach as a foundational resource. 

3 major challenges that have emerged in the wake

of the crisis: funding, business models and management

That’s why GSVlabs created Passport, a digital platform that provides on-demand, actionable tools for entrepreneurs to grow their businesses. We want to see entrepreneurship be available to everyone, everywhere.  For this reason, we’ve assembled and made available online all the resources startups need to grow, including community and networks, investors, mentors, skill development and learning resources, technology tools and business services. 

Just as all businesses must at times respond to changing circumstances, tech startups will need to adapt the way they run their businesses during and after this Coronavirus crisis. It’s important for startup founders and executive teams to examine the current economic, environmental, and technological changes and to create a new game plan for their business. Adaptation will be the key to survival during and beyond this crisis. Specifically, startups need to address 3 major challenges that have emerged in the wake of the crisis: funding, business models and management.   

many investors will focus on the cash

needs of existing portfolio companies 

Challenge #1: The Funding Challenge

Investors are conserving cash.  Venture investment around the world dropped 17% in Q1 of 2020 from Q4 2019. Early stage investments dropped 23%.   Crunchbase estimates that 5,000 to 7,000 startups that were depending on new investment to grow will be immediately impacted. Given the fact that the US only began to feel the force of the pandemic in the last two weeks of March, I expect investments to plummet even further in the second quarter.   And when they do write checks, many investors will focus on the cash needs of existing portfolio companies, and they will lean heavily on management teams to slash costs significantly. 

Challenge #2: The Business Model Challenge

Social distancing and other measures taken to slow the spread of the virus have resulted in seismic changes to the startup businesses and business models. In sectors like transportation and hospitality entire markets have been shuttered.  In others, like education and communication, new business models based on digital and online tools and services have been created or accelerated. And regardless of the sector, business models, supply chains, operations, delivery mechanisms and pricing strategies have been disrupted.  

Challenge #3: The Management Challenge

Startup founders, executives and investors may be least prepared for the management challenge. On the one hand, retaining and motivating talent is vital. On the other hand, salary cuts, layoffs and furloughs may be necessary to survive. Managers are facing unprecedented challenges with no prior experience to fall back on, including how to keep their teams safe, setting and adjusting targets in the midst of great uncertainty, and establishing and maintaining company culture and cohesion.  Managerial decisions on these fronts could be the difference between survival and failure.

startups should adopt three management

principals or mantras: Focus, Communicate, and Adapt.

Rising to the Challenge(s)

Startups will need to devise new tactics and strategies that enable their business to survive now, while also thinking ahead to the future. What is needed is a bi-focal management approach. Bifocals allow people to see near and far at the same time. In this case, management needs to see what is needed in the short-term to survive while also looking ahead to the long-term to thrive. In other words, we must learn to play offense and defense at the same time. Successful startups must find the right balance between prioritizing survival and planning for future growth.

To respond effectively, startups should adopt three management principles or mantras: Focus, Communicate and Adapt. 

I call them mantras because they’ll need management’s dedicated attention, commitment and repetition and perhaps also some cosmic intervention (or just plain luck!) to be successfully executed. But if successfully executed, these mantras will go help startups to overcome these existential challenges.

Mantra #1: Focus

Startups need first and foremost to focus on the most important element for survival -- cash. Startups should assume that this crisis will last longer and be more severe than they’ve currently estimated with funding rounds delayed accordingly. Teams will need to make their cash last as long as possible -- extending their runway. They should assume that revenues will also be significantly impacted. While “growth at all costs” has long been the Silicon Valley way,  preservation of cash, and profitability (or reduction of losses) over growth may be the post-Coronavirus crisis way. Companies that can raise investments should raise as much money as possible, without worrying about valuations for the time being. If they need to downsize, they should do so early and do so hard. Raising funds and cash flow management are the top priority for startup survival. Startups should also focus solely on their core business, competencies and value proposition. Ancillary markets, products and services are a costly distraction and should be set aside for now. “Rinse and repeat” has never been more important -- both for short-term cash preservation and for the consolidation of long-term product-market fit.

Mantra #2: Communication

In this crisis, management needs to communicate company plans with their team members and, albeit more selectively, with their customers and supporters. Key players should be kept up to date on what they need to know about the state of the business in order to keep relationships strong. In fact, now is the time for over communication. Leaders need to focus now, more than ever before, on communicating honestly and transparently with their team. Keep them informed of the company’s challenges and opportunities and engage them in open dialog. Leading with empathy and compassion, while staying open and optimistic, is the best way to maintain trust.

 

Companies also need to feed their customers’ thirst for information about the company’s plans and how it is managing through the current crisis. Use this opportunity to engage customers in a dialog -- developing a two-way communication channel. Similarly with investors and other supporters -- keeping them informed of the state of the company but also soliciting their advice and taking advantage of their experience and expertise. Finally, startup founders and leaders should communicate widely about their ideas and business. Strategic and smart communication could be an opportunity to emerge as thought leaders in your business sector.   

Mantra #3: Adaption

Companies who can adapt their business to the challenges ensuing from the Coronavirus will survive in the short-term and thrive in the long-term. Three key drivers of business transformation have emerged already as salient: (i) digital first; (ii) flexible pricing; (iii) variable cost structures. The shift to digital and online, which was already underway, is now a strategic necessity.  For companies who do it well, harnessing the online environment will be a competitive advantage. This is true for both product and services and for internal operations. Startups, even those that provide online products and services are themselves notoriously analog and physical in the way they’re managed. Startups that don’t embrace digital/online in their operations, in their supply chain management, and in the collection and analysis of product, customer and market data will not survive for long. Startups also need to rethink their pricing models. Special discounts and promotions may be necessary to help consumers and businesses with tight budgets become or remain customers. But more radical changes to pricing models also may be required. The adoption of subscription-based pricing, multiple pricing tiers that match the value of products and services being provided, and incentive pricing for long-term commitments are just a few examples of the various pricing options that need to be explored. Finally, rethinking the high fixed cost model that has enabled many startups to rapidly scale will need to be reconsidered. Startups need to consider variable cost structures that can be scaled up or down to match revenue in order to manage cash flows as their business grows or contracts.

Much like the virus itself, business growth and

setbacks may now come in sporadic and unpredictable waves.

Stanford economist Paul Romer’s famous statement, “a crisis is a terrible thing to waste,” has never been truer. Startups need to use the current crisis to make changes in their business and business model that will help them both survive and thrive. 

At the same time, startups need to be prepared for the fact that growth and success in this new environment will not be linear or based on a fixed model. Much like the

volatile economic conditions. The Prussian General Helmuth von Moltke, observed, “no battle plan survives first contact with the enemy”.

We should also be prepared to be punched several times.  

The key to success will be the ability to adapt to changing circumstances. Strong business models and smart entrepreneurs and teams will not be enough for startup success if they’re unable to adapt to sudden changes. What’s true in nature is now equally true in the world of business -- those who adapt survive!

virus itself, business growth and setbacks may now come in sporadic and unpredictable waves. Startups should prepare to change and adapt in response to

Or as the one-time world champion boxer turned part-time philosopher Mike Tyson proclaimed more directly “everyone has a plan until they get punched in the mouth.”

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