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It’s early-stage startup time

Why early-stage startups will best cope with the current environment

Marc Felske
May 5 · 7 min read

It is a controversial topic which startups will feel the most severe and permanent effects of COVID-19. Conventional wisdom would suggest that large reserves and good momentum are your best friends during times of economic uncertainty. Across industries, the pandemic has already had real consequences — both positive and negative — for startups in ecosystems around the world. But young startups still have reasons for hope. I’ve had the fortunate opportunity to speak with founders, investors, and people from several industries about the effects of company maturity on the ability to cope with COVID-19. In my conversations, I have heard many compelling arguments positing that early-stage companies may cope better than their late-stage counterparts.

Seven themes came up repeatedly during discussions:

Small teams. Early-stage startups, whose small team sizes allow them to move more nimbly, can implement drastic organisational changes, such as going into WFH mode, within hours. Some of the UK founders I spoke to enacted dry-run WFH scenarios two weeks before the PM announced a full lockdown. In doing so, the forward-thinking teams ensured that all their systems would work by the time COVID-19 forced all companies to adapt. Returning to a semblance of normalcy will also be a swifter undertaking for small startup teams. Agile startups will be able to optimise, especially from a workplace perspective, for each opportunity throughout the gradual relaxation of the government’s restrictions. In the most optimistic scenarios, small teams of 5–10 people could be allowed to gather in open spaces and conduct their team meetings in person, provided they maintain appropriate distance, within a few weeks. For small startups, this could mean that most or all of the company can return to “normal,” whereas larger, later-stage companies will need to continue to adapt their policies and procedures. Especially in times where company culture is critical, early-stage startups can rethink the “old normal” and import different elements into a “new normal”. The impacts on the team’s culture, cohesion, and mental health will be profound.

Image credits: Washington University St. Louis, Clara Steyer

Decision speed. Taking decisive action is critical to adapting to changing times. Cutting some projects and ramping up others at an unprecedented speed only works when leaders can make and execute decisions promptly. Jeff Bezos refers to this as the two Pizza rule: if you cannot feed a team with two pizzas, the team is too big to make quick decisions. While larger organisations can fall victim to groupthink, analysis paralysis, and over-discussion of good ideas during long-winded meetings with multiple committees, the small team decides, implements, evaluates, and iterates. Another development plays into some founders’ hands. In a B2B setting, corporate decision-makers usually have the luxury to explore a startup’s offerings in lengthy and often unpaid pilots. In today’s environment, however, if a startup is positioned to quickly solve a corporate’s top problems, suddenly bureaucratic hurdles are taken down, negotiation power for founders increases, and sales cycles shorten. A faster-paced environment where everyone is fighting for survival aligns buyers with the wavelength of early-stage startups.

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Focus. Focusing on a particular geography and/or industry, as many early-stage startups do, allows companies to optimise for one scenario. The reopening of economies around the world will create a very inhomogeneous landscape, and navigating this comes with compromises. Early in their lifecycles, most startups serve markets that are geographically located close to their HQs. Furthermore, it is unlikely that they have already hit the ceiling in their core target segment, whereas established startups and corporates have most likely had to enter additional segments and geographies. Thus, early-stage startups don’t need to find individual solutions to cater to multiple industries with varying needs — they can continue to focus on providing the optimal solution for a specific industry. For early-stage startups, restrictions on travel and the need to manage PPP or investment schemes are thus manageable. Metaphorically speaking, startups will likely find everything they need on the island they are already on and don’t have to venture into new territory right now when the sea is rough.

Image credits: Glasses: Unsplash, Elena Taranenko

Accountability and no social loafing. In a small team, few tasks are shared and everyone knows what they are responsible for. Visibility into each member’s contribution to the company’s output/performance is crystal clear. If something goes wrong, teams can quickly pivot to double-down their efforts and avoid grave consequences. In a young startup, every worker is essential. That feeling of personal responsibility for the team’s success ensures that everyone is fighting and bringing their A-game. While researching for this article, I came across the Ringelmann effect (Kravitz et al., 1986; Latané et al., 1979). It describes a rope-pulling experiment, which found that an increasing team size pulling the rope led to a decreasing force exerted per individual.

Image credits: Reuters, Jeff J. Mitchell

Sense of ownership. People who join early-stage startups are more inclined to be risk-takers who feel a deep sense of mission. The founders’ and first hires’ sense of ownership often materialise in the form of equity. In addition to having literal financial ownership, being a mission-critical contributor creates a sense of ownership and belonging. If the CEO has to ask the team to tighten their belts for a prolonged period, a team that feels a sense of ownership and mission alignment will be more likely to demonstrate high levels of acceptance. Compare that overarching sentiment with that of later-stage companies. Employees at later-stage companies do not necessarily feel mission-critical — tasks are owned by teams instead of individuals. Moreover, they expect the protections and benefits of a larger corporation. Lacking a strong sense of ownership employees are less likely to stay the course for longer, even amid hardship.

Image credits: Unsplash

Scrappiness. Teams in early-stage startups are much more willing to put up with temporary and scrappy measures. In contrast, in a large organisation, everything that is to be implemented in the organisation needs to be scrutinized. For corporates, an overly ambitious rollout or iterative process would be hyper-expensive. Temporary measures, too, could be rejected for being unprofessional. Early-stage startups’ inherent resourcefulness allows them to make those necessary decisions more quickly and to keep operational costs low.

Image credits: Haans Mulder

Hiring. Unfortunately, many people have lost their jobs in the last few weeks. Usually, startups that might not have the budget for lofty salaries and the ability to work with expensive recruiters compete fiercely for the best talent. However, this unprecedented situation levels the playing field, allowing early-stage startups access to talent that might have been too expensive just a few weeks ago. Many talented people will now be looking for jobs, and employers who move fast — not necessarily those who pay most — will be able to compete to hire exceptional talent.

Image credits: ageFotostock, No Author

To conclude, there are plenty of reasons why early-stage companies have structural advantages which should help them cope with the COVID-19 challenges. It’s great to see that many countries in Europe were fast to respond and provided bespoke startup financing and advice (a great read is this report LINK). I encourage all founders to make bold moves in order to come out stronger after the pandemic. For all founders who are looking for capital, consider starting the fundraising early and use resources that are floating on the web which list VCs who are still actively investing. Our fund, Romulus, is very much in business and continues to invest. When I look into our CRM — I’ve never seen so many startups being diligenced in parallel. We’ve invested throughout March and April and have no plans to slow down. Hopefully, most VCs will put the money where their mouth is, continue to invest and support their portfolio companies as best as they can. I hope the article helps readers to look positively into the future.

References:

Kravitz, D. A., & Martin, B. (1986). Ringelmann rediscovered: The original article. Journal of Personality and Social Psychology, 50(5), 936–941. https://doi.org/10.1037/0022-3514.50.5.936

Latané, B., Williams, K., & Harkins, S. (1979). Many hands make light the work: The causes and consequences of social loafing. Journal of Personality and Social Psychology, 37(6), 822–832. https://doi.org/10.1037/0022-3514.37.6.822

Marc Felske

Written by

Techie. Early-stage startup investor. Associate @Romulus Capital.

Marc Felske

Written by

Techie. Early-stage startup investor. Associate @Romulus Capital.

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