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Until the COVID-19 pandemic is over, survival has to be the imperative focus for startups. In this brief survival guide, we provide several tips for startups and their owners and managers to help them get through the crisis and stay in control of their companies.
The pandemic is very different from the financial crisis in 2008. Not all firms are losing out, with the value of some companies increasing on the stock market and certain businesses experiencing more demand than they were prepared for. In fact, some companies are hiring.
In contrast, many businesses cannot use their traditional supply and distribution channels and have temporarily closed or are facing reduced demand.
Challenge No. 1: Cash management
First, the biggest issue most startups face is cash management. Many estimates suggest that it’s likely to take 12 to 18 months (in a positive scenario) until a vaccine is found and approved, although the post-crisis effects may continue for longer. Such thoughts give rise to a fundamental question: how can startups survive during this period?
Companies need to prepare for further lockdowns. Preserving cash for this period is crucial for several reasons. While most investors honour deals, some may not.
Furthermore, the market for investments has also shifted. Valuations are down significantly, so getting money into the business is, and will be, increasingly difficult. Even for companies operating in sectors with high demand (such as health care), if the product-market fit is likely to be more than one year away, investors will be more cautious. Additionally, certain opportunities for generating cash short-term have frozen up.
On the upside, cash-poor startups are less likely to be distracted from their end goals by engaging too much in side-shows and can focus on evolving their core business model. For the next 18 months, the goal is to make sure they can stay afloat.
Challenge No. 2: Changing valuations
A second challenge in this market involves changing valuations so business owners need to have realistic expectations. The stock market has already crashed, but may go further down.
Startup valuations have become more conservative as well. It is harder to attract funding and companies trying to raise money likely lose even more equity. One reality for investors in times of crisis is that their expected returns are often much higher than in “normal times.” During the financial crisis, returns were typically more than double in comparison to less volatile periods. If possible, it may be worth waiting until the market has cleared the impact of the pandemic before raising money again.
Challenge No. 3: Leadership complexities
Third, leadership has become more complex. Transparency and honesty about the situation is key to building, establishing and deepening trust between management and employees. Excitement comes second. Dealing with emotions is as important as showing empathy and making people feel connected. It is important to stay true to values and vision.
Business leaders should consider not only having mentors, but a coach who is not involved in the company and understands the reality of your job. Coaching can contribute to well-being, prompt self-reflection for business leaders and help in making balanced decisions.
Having to lay off key employees is a traumatic experience. The labour market for top talent is still active. This crisis is selective, affecting some companies hard while others thrive. Laying off top talent makes it likely they will find a good offer somewhere else and not come back when the crisis is over. This is a further reason for startups to act very strategically in cash management for the next year.
Challenge No. 4: Changing space needs
Fourth, the disassociation from physical work spaces, and in particular, co-working spaces and incubators, might truncate social interaction. Startups depend on intense personal and social exchanges to stimulate creativity and experimentation; less opportunities for direct communication and spontaneous encounters might endanger respective startups’ growth.
Meeting virtually is particularly effective for drawing on existing social ties, and integrating and taking advantage of this digitalization movement will help startups emerge strengthened from this crisis.
Challenge No. 5: Consider pivoting
Fifth, pivoting your business model is something to consider during these changing times. Several startup firms in various sectors are changing the way they offer value to different customer groups during this crisis, for example by going online. Thinking about locking in existing customers and offering value to new customers with possibly different characteristics is a key to success.
A further consideration is whether to collaborate with complementary rivals, and whether to combine resources to launch new products that may be in greater demand. We have seen 3D printers being reused for protective equipment and distilleries producing hand sanitzers.
It is during crisis that responsible management practices and fair stakeholder treatment is especially visible. Making decisions quickly, transparently and equitably will go a long way.
By Prof. Felix Arndt, John F. Wood Chair in Entrepreneurship; David Crick, Paul Desmarais Professor of International Entrepreneurship and Marketing, L’Université d’Ottawa/University of Ottawa; Prof. Ricarda B. Bouncken, Chair for Strategic Management and Organization, Bayreuth International Graduate School of African Studies