Disrupting the disruptors — The impact of the coronavirus on startups.
Ever since the implosion of the WeWork IPO, there have been signs of change in the investment arena affecting startup funding. Funding activities are taking longer, increasing complexity and resulting in lower valuations.
The squeeze that startups are feeling is driven by the changing expectations of investors and funding organizations. The expectations have shifted; from lofty growth projections to economic fundamentals, like; traction, gross margin, sustainable growth.
The appearance of the coronavirus as an external disruptor and the implosion of the financial markets closes any path to liquidity events. The coronavirus is disrupting supply chains, customer access, events and day to day operations, indiscriminately affecting organizations and consumers on a global basis. Events that for many organizations are a challenge but not deadly, as they have contingency plans for disruptive events. Most of the startups do not enjoy the same preparedness. Thus disruptive events like the one that we currently face, are becoming fatal for startups relying on external capital to keep operating.
The impact of a prolonged global event will have devastating effects on their business model, activities, traction and funding.
The pressure of funding those startups will fall on the current investors, VC, and early supporters. Thus creating a negative network effect. Those organizations will reallocate capital towards protecting current investments to salvage their positions instead of focusing on new investments. Startups will have to adjust their cash burn and define a revenue strategy that relies on profitable growth, instead of external capital.
These are the moments where test the leadership. Will they make the necessary adjustments towards a path of sustainability? or will they bury their head in the sand and wish for unrealistic outcomes?
Startups that overcome this event, will become stronger businesses, in the long term. The adjustments in their business will have a long-standing effect. They will no longer be relying on external capital for their survival, and out of the crisis, they will have crafted an independent path towards sustainable growth, which will be much more attractive for future investors.