Written by Gary Stevens
It’s easy to see the economic devastation being foisted upon retail businesses by the still-unfolding Covid-19 drama. For those in the general population under stay-at-home orders, of which there are many, the evidence is obvious.
Favorite restaurants reduced to quick exchanges at the curbside, fitness centers shuttered completely and unsure what their reality will look when (if) they are allowed to reopen. Movie theaters marquees darkened across the world and Hollywood left reeling to wonder if the movie business will ever look the same again.
But what about the tech startups that pump the lifeblood of new products and services into an increasingly technical world? Holed up in nondescript office suites and warehouses around the world, how is the pandemic treating these fragile new entrepreneurial endeavors? The reality is a perversion of a Dickensian tale of two cities. Though none can likely claim it is the best of times and many feel like it is the worst they can imagine, maybe it’s slightly better than that, at least for a few sectors.
Let’s take a look.
Guardian Investors Nowhere to be Found
Tech startups live and die on the generosity of investors with venture capital to plow into dreams that they hope will eventually become the next Apple, Uber, or Airbnb. Under what has passed for normal conditions in recent years (as in a strong economy) money was plentiful and hopes were high but the Covid pandemic has clamped a hard damper onto that youthful enthusiasm.
When investors reduce funds or flat out disappear, tech startups feel the sting perhaps even more than traditional retail establishments because they often are still in the embryonic stage and have no cash flow or means of generating any for months or years. Their carefully calculated financial plans can easily fall into disarray, especially if planned products or services are not far enough along to even generate a minimum viable product.
It’s different with established retail presences. Take fitness clubs for instance. Some owners have pivoted to hosting online classes via the magic of Zoom, or have created a delivery service for their line of nutritional supplements. Neither is a perfect solution but it can allow a business to limp along with at least some cash flow until better times arrive.
Tech Startup Demise by the Numbers
For cold, hard facts, we turn to a report recently released by Startup Genome, an advisory and research firm dedicated to helping startups succeed. They’ve been asking questions of startups since Covid arrived and the responses are sobering. Here are a few.
- 65% of startups say they will be out of money by this October
- Only 15% have enough cash on hand to make it longer than one year
- 47% of startups have reduced labor costs by more than 20% to compensate
None of these numbers inspire confidence but if there is one silver lining to this dark cloud, it is the fact that the majority (53%) have been able to maintain labor cuts below 20%. Which trend takes the lead in the coming months will rely heavily on how the next few weeks pan out.
At the time of this writing, the first week of May 2020, many states are re-opening their economies (albeit with social distancing and other preventative measures in place) after a month or more of lockdown status. Whether Covid cases soar or remain under control over May and June will have a lot to say about the fate of startups for the rest of the year. If Covid blossoms and states go back into quarantine mode, expect that venture capitalists will continue to keep their checkbooks closed. Uncertainty is not an environment conducive to spending on anything but the essentials.
In light of this grim outlook we’ve just recounted, should startups just declare bankruptcy or go into hibernation for the next eighteen months, stopping all research and development until the expected Covid vaccine hits the market?
Good News Can be Found if You Look
What does a global population with 24/7 internet access do when they’re confined to home? If you said shop, pick up your door prize on the way out. While three-quarters of startups reported a revenue decline, that still left a healthy one-quarter than said cash flow has actually increased over the past few months. Inconceivable? Not really. Almost all the growth has been in B2C sectors and includes cosmetics, pet breeders and supplies, streaming services, exercise equipment, and…supernatural readings.
Add to this the rise in grocery store foot traffic, a boom in alcohol sales, and the comforting knowledge that Amazon will deliver (almost) literally anything to your front door within a few days – maybe a little longer right now, but you’ll still get it. Startup owners can’t be blamed if they feel a little like Job with all the bad timing but should focus on one thing. In the months leading up to the Covid outbreak, U.S. consumer confidence was well above historical averages, and you should expect that once all this goes away, it will be there again. All you have to do is hang on and the next section should help with that.
Looking for Grants in All the Right Places
Even better for startups that were already in full swing when the pandemic started is that the federal government has passed two (to date) massive aid packages designed to help small businesses keep their workforce employed during the Covid crisis. Granted, demand for these funds has been tremendous and money for the first round went fast, thus necessitating the need for a second, but any tech startup feeling an economic crunch should start the application process immediately if not sooner.
While the money you borrow under these programs is initially termed a loan, it will be converted to a grant and forgiven as long as you use the money for legitimate business-related expenses like employee salaries, mortgage or loan payments, and insurance, among others.
A final suggestion for tech startups is to sit down and take a long look at your current products and services. Is there anything you could change in order to be able to take advantage of the particular demands of the Covid economy? Keep in mind the B2C sectors we mentioned earlier that are showing great profitability. In business, this is known as a pivot and it just might save your company’s life.
Here’s one area to focus on – the remote workforce. Is there any way you could position yourself to take advantage of the rising incidence of working from home? If so, there’s a goldmine waiting for you somewhere in there.
Times are hard right now for many businesses. There’s no doubt about that, but times have been tough before, and yet companies have still emerged successful. For example, Procter & Gamble and Hewlett-Packard began operations during the Great Depression. Famed beer maker, Anheuser-Busch, survived Prohibition by switching to alternate products like ice cream, soft drinks, truck bodies, and non-alcoholic “beer.”
The lesson here is to not get caught in the downward inertia of the times created by politicians and the media. Instead, build your own upward momentum by doing what successful entrepreneurs have done for centuries when faced with heavy circumstances. Create their own good “luck.”