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How COVID-19 is affecting startups and what they might do to tackle the challenge

This is a time of unprecedented uncertainty; in the most dramatic and swift manner, a pandemic of as yet unknown proportion has changed the day-to-day lives of a sizeable proportion of the world’s population and wrought significant and perhaps lasting economic damage. The human toll, of course, eclipses such concerns, though it is still perhaps valuable to consider the consequences of COVID-19 on startup ecosystems globally and the ventures that reside there.

Startups are an essential part of the economic fabric of many nations, helping secure their future prosperity, and bearing multipliers – particularly in high-tech industries – that can exceed those of more established enterprises. The prolific increase in resources devoted to startup ecosystem development over the last several years indicates that governments now recognize the importance of targeting startups, and will hopefully take appropriate actions to ameliorate the worst of COVID-19’s economic effects. Though, if they do not, it may be up to founders and their champions to take decisive action and give them their best shot of survival.

Short-term consequences

In the short-run, many startups are likely to be concerned – primarily – with ensuring the safety and good health of their employees, whilst maintaining their operational capacity. Added to these concerns may be difficulties on both the demand and supply sides, with sharp contractions in consumer demand prevalent in many industries, and supply chains also coming under strain, if not breaking entirely. For those ventures not yet able to walk on their own, stock market losses and other COVID-19-related fears may prompt current backers and potential VC funding to dry up, leaving promising startups with potentially critical short- or medium-term liquidity woes.

Medium-to-long-term consequences

Though we are perhaps not yet far enough along the curve of this crisis to accurately discern its likely medium-to-long-run effects, even the most optimistic models of numerous respected institutions, including the WTO, are forecasting sharp falls in consumer and business spending that – in the medium-term – will result in a global recession and, perhaps – in the long-term, under a prolonged epidemic – a historic slump that could surpass the global financial crisis of 2008–09 and approach or eclipse the great depression. In such an event, startups that have survived the short-term effects of COVID-19 may be subjected to a more protracted malaise and contraction in consumer demand that could prove critical to startup prospects.

Sustained distress in the financial system and declining asset prices are likely to result in significant contractions in VC funding volumes, even if a full-scale banking crisis is averted because of strong bank capitalization and the macroprudential policy. A downward spiral, unabated by fiscal and monetary intervention could prove terminal to many startups that, in more ordinary times, may eventually have thrived.

Irrespective of the eventual gravity of this crisis, it will have short- and long-run consequences that entrepreneurs will be forced to navigate in order to ensure the continued survival and eventual success of their startups. There are some actions, both near-term and long-, that may give burgeoning startups the best chance of survival.

Maintain capacity

Firstly, maintaining operational capacity is important. It does not mean that things must be kept running at full capacity, particularly in the context of deficiencies in demand, rather than the core, critical functions of the firm must remain efficient and as close as possible to full-productivity. Identifying and targeting these areas, and preparing a plan to keep colleagues working remotely motivated, productive, and – crucially – in good spirits, is essential. Preparing or directing colleagues towards effective remote working tools and guides can help on the productivity front, whilst constant, calm, and high-spirited communication can help to instill a sense of confidence and aid morale. It will leave the firm better-able to respond to the challenges that will arise, quickly and decisively.

Revise plans and the numbers

Hoping for the best is not an option. Creating a credible plan that allows for the survival of the firm with minimal external funding and, if plausible, without external funding may be the key to the survival of many startups. This will require an intensive appraisal of the firm’s exposure and areas of vulnerability. Revising projected revenues and costs based on likely and worst-case scenarios will help prepare for what may be to come, and indicate which difficult choices might have to be made.

This may point, for many, to a need to diversify revenue streams. Even if this seems, on first thought impossible, deep and concerted thought must be given to ways in which current competencies can be adapted to capture future returns. Even if these plans remain thus for the foreseeable future, having at least an idea or two of what and, crucially, how different revenue streams can practically be made flow makes for sound risk management. On the supply side, considering or potentially securing supply-chain alternatives – particularly domestic ones – may be wise for some firms.

However this reappraisal takes shape, what is required now is that founders face the possibility of a graver and more protracted downturn and take actions now that they may find themselves less able to make in the future.

Securing funding

A difficult task in the best of times, securing funding in such times as these might seem a herculean one. That said, after a period of seemingly interminable pessimism and bad news, people will become accustomed to the new normal and invest. Being prepared to take advantage of these opportunities by being able to demonstrate that one’s company is robust or ¬– ideally – bears antifragility, may be key. Irrespective of the extent of the coming economic malaise, it will still be a good environment for good founders. By taking many of the aforementioned steps and minimizing reliance on external funding, conversely, startups can find themselves a more attractive proposition for VC’s dry powder later.

Government funds and other private grants may also be a valuable option to explore for funding, particularly for those in sectors that directly address health and wellness, but also those in other sectors viewed to be ‘favorably’ affected by market conditions. Foundations may also be a more speedy source of capital than equity investments. The key thing in the long-term is not giving up entirely on securing funding in the downturn.

Communication is key

As ever, good open communication can be a fundamental component of navigating this crisis successfully in the long run. Confident and transparent communication with employees, investors, and those to whom one turns for advice are wise. Keeping key stakeholders abreast of developments and part of the process can give comfort to all concerned with the company’s survival, and also help generate solutions to complex problems.

Whatever the eventual breadth of this crisis, it is important to stay hopeful. Many great companies have emerged from recessions of bear markets. With the right decision-making and a dose of good fortune, founders can make theirs the success stories of the future.

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