What impact the Lockdown will make on Startups?
2008 was not really The Black Swan but its impact has been. The CoronaVirus pandemic that started in December 2019 in Wuhan, China is the worst Black Swan humans have ever faced in this century. Quarantine and lockdown will be two words that we will forever be imprinted in human minds. The impact of the pandemic is huge in a short span because of the inter- connected world. Its impact does not end with Humans, it has made significant influence on certain businesses which will push other businesses also to rethink about their business models.
Turmoil in supply chains can bear significant consequences for Start-up’s across a diverse range of sectors, including technology and healthcare. The impact of China on the Supply chain of Fortune 1000 companies is over 90%. These companies must start from scratch to build their supply chain to avoid Chinese manufacturing.
Offshore business will move to near-shore and decentralized manufacturing will rule the world instead of single source outsourcing. There are larger chances that Patent owners might go for multiple country licencing models instead of focusing just on cost reduction with a single country origin production system. The catastrophic damage caused by CoronaVirus on the economy and that they cannot be predicted will force us to build robust systems for the future.
How Coronavirus pandemic will impact StartUp fundraising?
Are the startups anti fragile?… hell no! If you try to understand Black Swan effect on Startups, we will be surprised by the impact of it.
The early and growth stage Start-Up mantra is going to be- “Get acquired/merged or go out of business”. Early stage Start-ups might survive as they worry about the cost of Founders/founding team. Grants and seed funds might become accessible after the lockdown. and for healthcare solutions to handle Surveillance or any other essential needs businesses might get the access to Angel/Seed investment locally even before the lockdown ends. If the Start Up’s have already raised an Angel round, they need to rework on their spending’s, business model, revenue model, growth plans and take it up with the investors and mentors to understand the impact.
Work from Home is good for some businesses but not for Funding
Start Up’s which require to have multiple rounds of meetings with investors, for due diligence will take a hit. Venture capitalists who are in the mode of raising funds might not go smooth as their investors could be spread across the world. Fear will rule this game. Luckily India might be a safe haven for investments, provided we continue to keep pandemic in control. However, it will not be as easy as before to raise multiple rounds of investments for the founders. Investor meetings and due diligence will be done remotely in a couple of months’ time. So, businesses need to survive until then so that Investors understand the impact of this Pandemic and the course that governments across the world would take.
“Burn the cash to grow” will become impossible which will hurt Start-Ups which has long customer acquisition cycles. Eventually all these Start-ups will be forced to look for profits from day one, which might hurt the growth phase of many Start-Up’s. This will have a cascading effect on the next round of funding and the fund utilisation if they are ableto raise the fund. Venture funds will prefer to focus on the best performer to keep the bet safe, but they would continue to do the risk investments in a smaller size or with greater co-investments. Start-Ups which focus on overseas funding might hit a brick wall as they would be difficult to convince the VC’s.
How Start-up founders could survive Corona pandemic impact?
Whatever it is, founders need to act now or they will never get another opportunity. There will not be a second chance, inaction & unpreparednesswill cost a Start-Up.
What is the question every Start-Up founder should ask now?
- Do we need to change the business model? Revenue Mode?
- Will the existing marketing/sales strategies work now?
- What will our customers do in the next one to two years?
- How to reduce the Start-up’s Burn rate?
- What is the most profitable business model for a longer runway?
- What will my investors do?
- How should I gain the investors’ and other stakeholder’s confidence?
- Do we have enough security systems in place to move the work out of the workplace?
Years and years of our learning about customers, buying perceptions, sales cycles, inventory, revenue, burn rate, and runway are invalid in the current scenario. It’s a common perception among the founders that the runway lasts until the next round of funding and this will no longer hold/be true. The assumption of the next round is questionable and even before that growth plans until the next round will differ.
Is this weeks, months, a year, or year’s problem?
Uncertainty is not new for Start-ups in the game of risk vs reward. The biggest challenge with this Black Swan is how long it will last. It’s not just during the lockdown even post lockdown it’s going to have an impact not just in India but also globally. If it exists for just a few weeks, we need not worry much as we will have some ups and downs as India has handled it better than other countries. We have plenty of opportunities.
In case if the pandemic goes beyond three or four weeks or even stays for a couple of months then we must freeze immediately on costs that do not give immediate revenue. Many Start-up’s will find it difficult irrespective of whether it’s funded or not.
If it goes beyond a couple of months, Start-up’s should be prepared to handle the rough seas starting immediately. Life saver mode might go on from a year to three. As soon as the timeframe crosses three months the Start-up’s/Investors should prepare for the survival from reviewing the infrastructure costs, perks, burn rate, renegotiating all the contracts, etc.
Marketing and Sales strategies will transform dramatically to online but enabling that would be tedious if the Start Up’s are already not online. Thanks to the digital payment push from the Government of India that would play a greater & bigger part now. The fundamental and most complex question is no more the sales or profit or execution. It is, whether your product market fit is still valid in these uncertain times. Start Up’s need to rediscover whether to offer additional features or change the product from the bottom. Businesses might be surprised to find that their competitors are irrelevant. If the scenario is expected to go beyond a year then business model changes, revenue models will change, delivery and sales process will change. Until a vaccine is found as a prevention or a cure is found fundamental business working models become irrelevant.
What is the responsibility of a Start-up founder & how to handle Covid 19 pandemic crisis?
A founder is expected to find solutions to all challenges in front of him/her during this period. This will transform him/her as a compassionate leader. Once the Founders reworks production, Inventory, marketing. Sales, revenue, delivery models need to communicate that effectively to various stakeholders of their Startup – from their employees to investors to vendors to partners. Founders must gain their confidence during these challenging times. Extremely hard targets are best to be avoided in their growth plans as it could hurt all the stakeholders unlike normal period.
Founders must start by cutting costs in all possible ways which doesn’t directly connect with the revenues. Founders are passionate people sometimes the same passion which builds the business will kill it. Founders should be ready to lose the cards which they had been holding close to their hearts if that is not going to make profit. Keep the magic for dreams as this is not the time for it.
How Mentors and Investors can help StartUp Founders?
In uncertain times it is always better to cut down the capital and operational expenses to maximum extent. Discuss with investors and keep in touch with them to understand the Investment industry & updates to increase or further decrease the burn rate. Understand that investors might be trying to do the same, so be level headed, empathetic and focussed. This is the time to come to a different level playing field.
Founders can acquire their competition if they have ample money with limited burn rate or can merge with the competition. If the money is limited and if the burn rate is huge, the founder can decide to make an exit. If the business has a very high burn rate, reduce it, and try to merge or get acquired within a month or two better to lose equity than the whole value. Understand that the inflated valuations will dive deeper in no time when the investors find no growth prospects so talk to founders/ Mentors and even Angel investors for deal making. Do not blame the VC’s and never bring the differences to the public.
If investors had witnessed 2000 and 2008 from the frontline, they would have a greater financial wisdom and their investment decisions would change as an investor. Find the grey hairs who had been there to support and sail through this unprecedented challenge. An advice from a fellow founder could be a disaster as they might not have gone through these challenges. It is not really a market crash; this is a temporary shutdown of the economy. Find a Mentor who has been there and done that already. Mentors can help you to talk to the investors and also for mergers or acquisitions.
Even in these turbulent times Start-ups in Tourism, travel, food tech, grocery, ride hailing, space tech, etc., had raised funds for growth in the last 30 days. Keep faith, disrupt your industry and funding will happen.