Business as (un)usual: Why a Crisis can be a Great Time to Start a Company
The economic challenges brought on by COVID-19, while deeply unsettling, provide many opportunities for early-stage tech companies.
The COVID-19 pandemic has evolved into the greatest global public health crisis since the 1918 influenza (H1N1) pandemic, with profound social and economic consequences. Stock markets have plummeted, countless countries have gone into lockdown, and unprecedented restrictions have changed our everyday lives.
The crisis has also affected the early-stage tech sector and poses immense challenges for emerging companies. While Venture Capitalists (VC) have issued warnings about raising money in the short term future, Airbnb has announced a $1 billion term loan from a Private Equity firm syndicate to bridge this financially difficult time and numerous companies have laid off or furloughed thousands of employees. The crisis has created a climate of uncertainty and risk aversion, particularly for entrepreneurs.
And yet, history shows us that successful companies like Uber, Airbnb, WhatsApp, Slack, Asana, Square, Beyond Meat, GitHub, Zalando and even giants with the likes of Disney, CNN, Microsoft, and Apple were all founded during a recession, proving that macroeconomic market timing might not be the defining factor when it comes to success. In fact, every crisis also creates its own opportunities.
The economic challenges brought on by COVID-19, while deeply unsettling, provide many opportunities for emerging companies, especially because we are living today in a much more digital world. We are convinced that the current crisis will act as a catalyst for change.
Here are some thoughts on how to help founders navigate the crisis and use it to their advantage. As Winston Churchill is believed to have said, “Never let a good crisis go to waste.”
- New problems create room for new solutions
While incumbents and larger startups are fire fighting to get their affairs in order and battle declining customer demand, layoffs and funding problems, new founders can focus on creating and testing solutions for problems that might not have existed before.
Big companies, universities, and other institutions are in need of solutions for the now-normal that we currently live in and the new-normal after the virus. Moreover, many measures like remote work are likely to have a permanent effect, even after the coronavirus is tamed.
COVID-19 has emerged as a societal catalyst for digitization and technology is now mature enough to disrupt even slowly evolving verticals like Healthcare and Public Education. Newly founded companies can claim these recent opportunities by leveraging their technical independence and pursuing greenfield projects without the cost of existing legacy tech!
Furthermore, peoples’ time accounts are being remixed right now, leaving potential customers with more time and a higher tolerance for new business models, technologies, and apps. For example, companies like Uber and Airbnb profited from the economic climate of the financial crisis in 2008 massively by opening up new income streams for people in times of economic uncertainty
2. Hiring top talent is easier, cheaper and above all else possible
Attracting good talent is always hard. But it is even harder in times of economic prosperity: Prestigious employers pay top dollar for talent and one-up each other with employee benefits. In times of economic crisis, however, a decrease in open vacancies, as well as mass layoffs, consolidate the market for recruiting opportunities which in turn leads to lower opportunity costs for employees and might give even small companies with limited financial resources the opportunity to hire people that previously would have been too expensive or unavailable. This might fuel the overall trend we are observing, even in the long run, that the early-stage tech sector is increasingly winning the bid for top talent against corporates, especially for entry-level positions.
Furthermore, a lot of people currently work from home. Newly founded companies have the great advantage of having small teams and can thus work much more efficiently than big companies, which have to manage massive teams.
Let’s be honest: The road to building a successful startup during a crisis won’t be easy. But it’s an opportunity to build a loyal team that is tried and tested and that has gone through adversity.
3. Money is tight and this is the right time to focus on sustainable growth
Raising money is harder now, as my colleague Maja explains here. But investors continue to have funds and are still committed to their LPs: They need to invest in order to deliver returns.
We see, that the venture capital market is now correcting itself:
- A surplus in funding has led to too high valuations, especially in the U.S.
- Systemic failures that allowed disasters like WeWork and Theranos will not happen again (at least for some time) because investors are more careful.
- We observe fewer foundings, less pre-seed activity, and thus less seed follow-on rounds.
- However, VC funds have been raised and are active. We expect this to result in larger rounds for the concentrated market.
We truly believe that exceptional founders will always be able to raise money and hence stay committed and will continue to invest. For companies that are able to persevere and adjust to the market climate, this presents the opportunity to emerge much stronger.
As COVID-19 is catalyzing digitization, this also presents the opportunity to find a more sustainable path for venture businesses. Validating revenue models may be emphasized even earlier on the journey than before — simply because it will be required from the market conditions the company operates in and also from most VC firms.
This also means that founders will have to turn every penny thrice instead of twice. But ultimately that’s a good thing, as it leads to more thoughtfulness and founders building their companies in a more sustainable way. It can prevent founders from making bad hires, pursuing too many markets simultaneously, and making bad marketing decisions. This is an opportunity to build a lean company that does not lavishly overspend and, in the long run, increases the chances of success and building a truly good company.
4. Customer needs and product-market fit is king
Sell painkillers, not vitamins.
Since money is scarce, potential customers will only buy what they really need. Founders need to understand exactly what those needs are and how to meet them. It is imperative to adjust the value propositions with the market realities and be clear about the need one solves and the benefits customers get from using a particular product or service.
Newly founded companies have no legacy costs, wages, etc. Rent and office supplies might be cheaper, too. Founders can undercut the prices of the competition because they are more agile to adapt and have barely any costs. Growth might happen a bit more slowly compared to economic growth times, but the company will be in perfect shape and ready to scale for when growth returns. Similarly, sales will be hard but it will be feasible. So there is a real opportunity to build a reputation as a tried and tested founder.
Finally, there is less competition because fewer people have the courage to start a new company.
We hope this gave you some ideas, maybe even hope or at least motivation to consciously continue with what you’re doing and will close this article with a quote from Walt Disney: “I’ve heard there’s going to be a recession. I’ve decided not to participate.”
