Episode 1: A COVID-19 winter is coming for Australia’s startups
Do you have a plan for the impact of the pandemic on your startup? Get one, fast.
In a briefing to portfolio companies, A-List venture capital investor Sequioa Capital calls COVID-19 a black swan event — something rare, of significant global impact, and difficult to predict except in retrospect.
Uncertain times always come with new opportunities for those in a position to identify and exploit them, but most black swan events are bad news for most of us, not good. With an event like COVID-19 not only is it difficult to forecast what will happen across the world, it’s difficult to forecast how long those effects will take to play out.
As with the crazy panic-buying of toilet paper in Australia’s supermarkets and plunging stock markets worldwide, the logical effects of the pandemic are only a small part of what we need to plan for — the bigger risks lie in the ways people, companies and societies might react irrationally. Fear and greed are very hard to predict accurately.
The Economist says sharemarkets and commodity prices will continue their falls until investors can see conclusive evidence that the rates of new COVID-19 infection in major nations have peaked and prices are low enough that investors start buying undervalued stocks. That’s some time away still.
In the meantime, we will probably see a global credit crunch, recessions in many countries, and any nation or business with too much debt will find it hard to avoid loan default. The credit drought will extend all the way to the kitchen table — Australians hoping to get a home or car loan will find the hurdles higher and founders hoping to keep growing their startup will need to adapt too.
Arrivederci, angel investors
Expect angel and seed round capital worldwide to dry up, and in Australia, that means it will almost entirely disappear for a while.
Angel investors tend to invest out of very flexible cash reserves that they might need to keep handy to prop up the business that made them an angel investor in the first place, especially if it’s in travel, events, logistics, transport, distribution, retail, hospitality, health care, real estate, lending… oh dear, so many categories.
While VC fund managers need to keep investing cautiously during uncertain times, the angel investors and angel networks don’t, and probably won’t for a while. If they’re already on your cap table you should jump on that phone right now before the depth and duration of the winter becomes obvious and see if you can stitch together a quick bridging amount. Accept a down round if it means banking some money before mid-year.
Annyeong, first round VC cheques
While some Australian VCs recommend you bring forward your next capital raise too, when I consider the slow pace of raising investment in Australia and the rapid onset of COVID-19 so far, I don’t think any amount of ‘bringing forward’ is going to help, unless the round is very nearly closed already.
Expect the VC fund managers to swing away from looking for new investments and towards reserving capital to protect the companies already in their portfolio.
Expect VCs and angels to try harder to push down on your valuation when negotiating a term sheet, expect them to offer a smaller amount, and expect them to be more reluctant to lead the round.
Expect them to say yes to coffee, but no to investing, unless you can prove that you’re such a safe bet that you don’t really need the capital.
Zàijiàn, accelerator programs
Incubators and accelerator programs have been the startup industry’s work-around to address the shortage of early-stage investment in Australia, so you might have been expecting the number in Australia to hold steady, or even increase, if early-stage investors are planning to go into hibernation.
But Australian incubators and accelerators are mostly corporate or university-backed programs, which cost a lot of money to run in the short term and have an unproven long term return on investment, maybe.
Corporate leadership teams in most industries will be looking for non-core expenses they can shed, and accelerators/incubators fit the bill nicely. Expect many of them to ‘be put on hold for the time-being’ aka no intakes. Australian universities reeling from a rapid double-digit shortfall in revenue will shed their accelerators/incubator costs too, though because most Australian universities are slow to make decisions, it might not happen until the end of this year.
Xièxiè, Shenzen… kinda
It looks like the extreme restrictions put in place in China may have slowed the COVID-19 infection rate enough that we might see the great Chinese manufacturing engines cough and splutter back into life again soon.
However the tiny backlogged order from your little Australian tech startup will have to wait until larger, more valuable customers’ needs are met, so you probably won’t see your Kickstarter units shipped to customers for some time yet, whatever factory managers are telling you.
And that’s just making them. I can’t speculate on how much disruption there will be in transport and logistics between the factory and the customer. I think the provincial lockdowns that turned into a national lockdown in Italy this week will also be a containment strategy deployed in other dense populations in Europe, North and South America, meaning your customers in those markets may be waiting a very long time. Those lorries don’t drive themselves, and neither do the FedEx jets.
What should you do to survive this?
First of all, take care of your health, your family’s health, and your team’s health. Most software tech startups can survive a couple of months of working from home, even under quarantine, but they will suffer greatly if 20% of the team is out of action with a high fever for a week or two, especially since that might mean a different 20% of your team down with it for the 4–5 months.
Be prepared for the likely chance that healthy team members will be involuntarily quarantined for two weeks because they were in the wrong place at the wrong time. Be prepared for productivity to drop when team members have to care for friends and family members who get it bad, particularly parents and grandparents. It will be very hard to care for a family member at their home or yours without also becoming infected. Unless we can flatten the curve of infection rate in Australia, be prepared for hospital care to be significantly degraded and for acute care beds to no longer be available at some point.
Follow the health guidelines about personal hygiene, minimise travel and stay out of airports, shopping centres and (sadly) co-working spaces and get used to working remotely if you’re not already.
How long will it last?
It’s hard to know how long the COVID-19 winter will continue. Rather than plan to make your runway last three months or six months, you should plan to make your startup’s runway last as long as possible. The best way to do that is to cut to the bone as soon as possible.
The goal should no longer be to maintain your current rate of growth in your key metrics, it should be to not go into receivership before the world returns to normal. Let go of growth, ambition and ego; prepare to practice dogged, unglamorous frugality for as long as it takes.
If CAC is greater than LTV, or if you’re pre-revenue, just stop acquisition marketing. Hard stop. Stop work on the next version of your platform, the other OS you were hoping to launch on, and of all new features.
Fix critical bugs, practice good devops, and excellent customer service. You can’t afford to lose the paying customers you have.
Don’t do it secretly. Blog about it and email them. In winter, customers appreciate somebody prepared to tell them the truth.
Get out of that lease, maybe even if it means losing a deposit. Work the team from home.
Look hard at the team and come up with a plan to continue core functions of the business with fewer people, in all areas of the business.
The sooner you let non-core people go the more likely you’ll still be able to pay out their full entitlements.
Write them a glowing recommendation, write up each person on your company blog and socials, and connect them personally and directly to anybody you know hiring who can make it through the winter better than you.
Get them setup on all the crowdsourcing and freelancing platforms with the best possible profile and some examples of work. Be their first freelance client.
Let them keep the laptop, the phone and the external monitor — you don’t need to care about shepherding assets right now and you probably can’t afford to store them.
They’ll remember you for how you let them go, and most will understand why.
Don’t expect most people to tell you this
Precautions are measures we take to prepare for events that most people are betting won’t happen. If you wait until the adverse events are occurring, you’re not taking precautions, since there’s no “pre”. Remember that it’s the irrational emotional reactions of people and business that are the real danger to your startup.
Everything I’ve predicted here about the behaviour of investors, corporates, governments and customers is irrational behaviour, and politicians, investors and business leaders will never willingly admit to their own irrational behaviour. So expect them to deny that this will happen, that it is happening, or that it ever happened.
But if my experience of the global financial crisis and the dotcom crash (yes, I’m that old) is any guide, it’ll still happen.
This post is now a two-parter. Here’s the second episode.