What should you do now to ensure your startup can survive and thrive during the coronavirus pandemic, and its aftermath?
It is very clear that the outbreak of the COVID-19 virus is serious. It is already delivering an impact more significant than we’ve seen in hundreds of years. We’ve barely seen the tip of the iceberg of what could happen. The time to act is now.
Here’s what we can expect based on the data so far and historical cycles. Plus, the essential steps to make so that your startup stays in business and can even come out on top.
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What To Expect Next
The World Health Organization’s (WHO) report on March 12th, 2020 shows over confirmed 125,000 cases of COVID-19 worldwide, with close to 5,000 deaths.
However, even places like Ohio have estimated they probably already have 100,000 infected individuals, and that is growing fast. We are likely to see far, far high curves in the data in the coming weeks.
While many say the common annual flu is much worse and more deadly, we’ve already seen the coronavirus pandemic claim more lives than 9/11. Some statistics appear to show very low fatality rates. Down in the single digits. However, these generic stats don’t show the full picture. Among those 60 years old and older, or who have pre-existing medical conditions, the mortality rate can exceed 20%.
As with business and financial markets, our patterns of disease and epidemics seem to have a history we can look to for forecasting what’s next as well.
The last time the United States faced something like this was the 1918 Spanish Flu. It was responsible for the deaths of around 50M to 100M people. Countries like Iran lost almost 30% of their entire population. It was made worse by people cramming into health facilities, malnourishment, and lack of hygiene, which was compounded by a mutation of the virus.
Today, we may also find much of the pain comes more from the financial side effects and chaos that stems from the reaction to the virus and countermeasures being implemented by governments.
Panicking is only going to make things worse, yet it only seems wise to get prepared. Hope for the best, but be ready to weather the most likely scenarios. This applies to you personally, your community, your startup business, and finances.
The Impact Of The Coronavirus
The unprecedented response to the viral outbreak itself says a lot.
Consider the cancellation of NYC’s St. Patrick’s Day parade. This is the first time it has been canceled in over 250 years. A ritual that predates the forming of the United States. We are looking at the size of a crisis that may only come along once every 10 generations.
Virtually all major sports franchises have canceled events. Major business events have been canceled or banned. Colleges across the country are being closed. The cost is already well into the billions of dollars. A loss which many will not recover from.
Spain has copied Italy’s move of beginning mandatory quarantines and physically blocking streets with the use of law enforcement. Even New Rochelle in NY has seen the creation of a ‘containment zone’ and the National Guard deployed in the streets.
It’s probably not the end of the world. Though, for many, it will temporarily be the end of society as we’ve experienced throughout our whole lives up until now. The side effects of that shouldn’t be underestimated.
The graph below gives you an idea of what could happen if proper measures are taken by policymakers to flatten the curve. Up until then what we are seeing is an exponential growth of people getting infected.
Too Close To Home
The average family is already experiencing a lot of chaos in their daily lives.
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Young children are not going to school. Older children may no longer be heading off to college. Parents may effectively be laid off, or on temporary leave while organizations figure out how to catch up and operate remotely. Their parents and relatives may be sick. Stock portfolios are tanking, and bitcoin hasn’t proven to be a safe haven.
Then there is the stress of simply getting groceries and toilet paper. Wondering if you’ll have the medicines and food and basic necessities to take care of your family next week.
Fortunately, today’s entrepreneurs should be well equipped for this. They should have learned to be flexible, adapt on the fly, stay focused in chaos, and to work and run operations efficiently in a virtual setting.
One of the most important things for all is to remain calm, destress, enjoy the moment, and stay healthy. Eat well, exercise, and continue to be able to perform at your personal best. Do that, and you can handle any of the curveballs being thrown at you.
Clues From Previous Emergency Rate Cuts
In terms of the financial and economic impact of the pandemic, we can see patterns from the Federal Reserve’s recent emergency rate cut.
In early March 2020, the fed made an emergency interest rate cut to just over 1%. The last time they did this was the financial crisis of 2008. Before this, it was 9/11. Then in the dot com crash.
Experts now forecast that another emergency rate cut could put rates at zero before April 2020. They could easily go into negative territory.
This may sound great. Yet, for the average person, zero rates are of little help if access to credit is also slashed.
Given what has been happening in the stock market, it doesn’t seem that others believe it will make a world of a difference either.
The Coronavirus Impact On Startups
There are clearly some industries which are already taking a massive financial hit.
- Import and export
Others are clearly benefiting in the short term. Like retailers.
Obvious side effects startups will be encountering include:
- Transitioning to a remote work environment
- Potential dive in the value of commercial real estate assets
- Staff who are distracted, stressed and ill
- Declining stock prices
Substantial problems could emerge and become even more severe for some startups in the next few weeks.
The willingness and ability of consumers to spend with your company may be one of the biggest. People are out of work, could face being permanently laid off, their retirement account balances are crashing, they are spending more on healthcare and disaster preparations while earning less. If you are a B2B startup, your corporate customers can be in the same situation too. Customer acquisition growth rates may slow.
Even if your company is making sales, the logistics of actually delivering on those sales could be a huge issue. Both in the supply chain to you, and getting the product to customers.
M&A activity is likely to at least stall for the next two weeks. Then there may be a small buying spree at lower valuations as opportunities present themselves, and if the spread of the virus is brought under control. Companies like Google or Apple are literally sitting on hundreds of billions of cash.
It is going to be a tough time for IPOs. That may not change until 2021. To give you a better idea, since World War II here is how much time it has taken for the S&P 500 to recover.
Even raising money for your startup is probably going to become more challenging. It’s not impossible. Most VCs are taking the long game view and will still make sound investments. Though these rounds may become smaller. The money is likely to go to those startups with the best financial fundamentals, or which are poised to benefit from this and future epidemics.
Paul Graham, the founder of the accelerator Y Combinator, wrote a great piece titled Default Alive or Default Dead? where he describes common circumstances that put companies in a Default Death position and current circumstances may accelerate this situation for many startups. As he states, having a plan B is critical. If plan A is to raise investment to address the cash needs, then plan B is what needs to be done if investors are not going to step in.
We could also be looking at one of the most massive shifts in wealth and population have seen since the pioneers headed west for the California gold rush. What if 20% of our over 60-year-old population doesn’t make it through this pandemic? What will happen to their money in a year from now? What will happen to those that have built businesses based on serving this demographic?
Fortunately, there are startups out there who are incredibly well-positioned to benefit from this tragedy. They have solutions that can help. They have business and logistics models others will need more urgently than ever. They have built trust, confidence, and loyalty.
The Petri Dish Of Another Financial Crisis
Sequoia’s presentation R.I.P. Good Times, which is created for the 2008 global financial crisis is circulating again after the firm sounded the alarm on a post geared to their portfolio companies titled Coronavirus: The Black Swan of 2020.
Among the reputable VC’s observations on what lead to the Great Recession were:
- Falling asset prices
If any of that sounds familiar, wait until credit markets freeze up.
How Startups Can Survive & Thrive The Days Ahead
The overarching theme here is managing what you can control. There may be more things out of your control in the next few weeks than you’ve ever experienced or dreamed of in your life until now. Taking that in your stride is a part of everyday life as an entrepreneur and startup.
Here are the top tips for acing what’s next.
1) Be Sure You Have A Must-Have Product
In times like these when consumer and business spending can be tighter, you have to have a must-have product. You also must make sure your consumers have the ability to pay for it.
Don’t slack on quality. Word gets around fast.
2) Be Scrappy, Stay Lean
While this may be a very important time to lean on seasoned advisors and to leverage the experience of those who have been through other crises, it may not be the best time to spend big on bringing in an outside CEO, or other high-cost executives.
In fact, while you need the best team and may need more specialized talent, you may need to slow hiring, and even trim the fat by making substantial layoffs. Prune as much as you can. It is better to do it once, than for your team to suffer the demoralizing and scary effects of repeat layoffs.
Instead, turn to consultants and on-demand remote help as needed. If these trends continue, you’ll find more great labor available at even better rates in a few months from now.
This is time to be a scrappy startup, operate lean, and retain that bootstrapping founder mentality. Every dollar you spend needs to achieve a great return. You need a nimble and fluid organization.
3) Get Profitable & Cash Flow Positive
It may not have been very trendy lately, but getting profitable and staying cash flow positive is becoming far more important. It’s going to be far more attractive and fashionable to be profitable in the next couple of years.
This is true for raising money, getting acquired or going public. It also means you’ll be perfectly fine if none of those are easy options. You can hold out until the financial winter thaws out again.
4) Fundraise and Take The Money NOW
In spite of the chaos, investors seem to continue to be surprisingly bullish. At least for now. They may not be as liquid and confident in 6 or 10 months from now. The terms you’ll be offered could easily get much uglier. Take the money now if you can get it. Move up your raise. Increase your raise and take in far more runway than you think you’ll need. It is better than running out.
When it comes to fundraising, according to Pitchbook investors have over $189 billion in “dry powder“ that they must deploy int he next few years or give it back to their limited partners. Tom Guntz published a great post titled What Could The Venture Market Look Like In The Coronavirus Era showing data were on the crisis of 2008 only one quarter showed a dip in early-stage investments. Aside from that VCs were still investing in as many rounds. Below is a graph showing how the number of financing rounds continued to climb.
With this in mind, companies that are looking for a Seed round or a Series A financing should continue to march forward seeking investors. It is in times of corrections where some of the best companies are created. In 2008 alone companies like Airbnb or Dropbox were created.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
5) Just Keep Marketing, Just Keep Marketing
One of the biggest mistakes companies make in times like these is to cut back on marketing. It will be the end of you. At best, a slow death. Do demand a better ROI on your marketing. Though, this may be the opportune moment to expand and pick up the slack from your competitors and seized their market share.
6) Use 100% Remote Teams. Period.
There are very, very few scenarios in which startups need in-house teams and to be in an office with all of that risk and overhead today. Others are already building billion-dollar companies with 100% remote teams. They now have a huge advantage. Now it is an absolute must to break free from that old way of doing things and operate in the cloud.
If you can sell your real estate assets now, you will probably be much better off in many ways. Get rid of debt and overhead, gain a capital injection, and avoid declining values. You can always buy them back cheaper later if you really want to.
7) Be Ready For The Opportunities
Huge and exciting opportunities are emerging right now. Be alert to them. Have the cash to take advantage of them. Cash will be king in the months ahead.
8) Lead By Example
You can’t be a president, and say one thing and do another, and expect others to listen, no matter the excuse or justification. This is the same for the founders and business owners.
Stay calm and optimistic. Choose temporary social isolation for the benefit of others, if not yourself. Keep up healthy habits.
Challenges are coming. Just like every other day of being an entrepreneur. Look for the way to pivot, innovate and use it to make your product and business better. It will pay off in the long run.