The Confined Startup
Intense coughing fits. Blood leaking from nose and mouth. Crippling headaches and body pains so extreme you felt under torture.
These were the symptoms of a disease that was first recorded in Haskell County, Kansas in January 1918. From there the illness grew quickly; the US troops deployed en masse for the World War I effort in Europe carried the virus and spread the virus like wildfire through England, France, Italy and the entire world. It became eventually known as the Spanish flu due to, well, rather ridiculous reasons¹.
And while its effects on the body were awful, the mortality rate was truly terrifying. During the pandemic that lasted two years between 50 million and 100 million people across the globe died. To give you a sense of scale this is more than all the soldiers who perished in World War I (11 million) and World War II (25 million) combined, and about the same if we add civilian casualties in both conflicts. More people died of influenza in a single year than in the four-years of the Black Death Bubonic Plague from 1347 to 1351. It was a global disaster of truly staggering proportions.
Covid-19…18 Again?
A century later, we are facing a new pandemic. Though it is far, far less deadly, something that the Coronavirus shares in common with the Spanish flu is that most casualties are due to a form of pneumonia which takes hold as the immune system is weakened. It has hit particularly hard in Spain, with almost 200 thousand registered cases and over 20 thousand deaths as we write these lines, the world’s highest infections to population ratio², even with the most strict “shelter in place” regulations enforced with severe penalties to those that leave confinement. Lucky for us there is plenty of evidence from China and Italy so it is unlikely this strain will pass to history as “The Second Spanish Flu”. But you never know.
It may have been a matter of time and could have happened earlier with SARS, MERS, Ebola and whatnot, but in any case it is mind-boggling how the virus has brought the global economy to a standstill in just a few weeks. As Dustin Hoffman’s character says in the 90’s movie Outbreak³: “You have to admire its simplicity. It’s one billionth our size and it’s beating us”. We as a species believed that our dominance on this planet was granted and it turns out all it took was a tiny organism to bring us to our knees. No doubt we will eventually defeat it, however let’s remember this moment next time we hear that we invest too much in biotechnology or that medical research should not tamper with nature’s secrets, lest all hell breaks loose. Hell may break loose anyway, anytime, anywhere.
Looking Back, Looking Ahead
Moving forward it is rather unlikely that people will be forced to stay at home much longer. Social distancing is experienced very differently based on your particular situation, your means and your personality, with extroverts suffering the most and an introvert-bordering-Asperger like me quite enjoying the time management, calmness and concentration brought by the seclusion. However regulators will eventually have to balance the lives saved due to reduced infection rate with those lost to the dramatic increase in domestic violence as well as drugs, alcohol, mental illness and suicide, known as “Deaths of Despair”⁴.
The longer the suppression measures last, history shows, the worse such outcomes will be. Unemployment particularly is a well-established risk factor for suicide. The U.S. suicide rate was 12.1 per 100,000 from 1920 to 1928 during the Roaring Twenties. After the stock market crash of 1929, the suicide rate skyrocketed 50% to 18.1 per 100,000⁵. During the last recession, from 2007–2009, the bleak job market helped spike suicide rates in the United States and Europe, claiming the lives of 10,000 more people than prior to the downturn. This time such effects could be even deeper if the economy crashes and job loss skyrockets to historic levels: a forecasted unemployment surge of 20% in our economies could be responsible for an additional 20,000 suicides.
To look ahead it is often good to first look behind, checking history for lessons because it often repeats. Along these lines, did I just mention about the “Roaring Twenties” that started in 1920? If you put two and two together you’ll realize that is right next to the Spanish flu of 1918. Yet that is exactly what happened: in spite of the worst pandemic in history, two years after the initial outbreak, in a day and age when everything moved at a much slower pace than today, the stock market was at record highs and a golden era of economic expansion started. Keep that in mind as well when you hear that “this is the end of our civilization as we know it”. No doubt there will be minor social adaptations to the crisis, but that’s all; we humans are resilient, if not stubborn animals, and we’ve seen much worse. I am not even betting on cheek kissing and hand shakes going out of fashion in our latin cultures any time soon. Who wants to pick the glove and put some money on it?
Nevertheless two years is a very, very long time when you are a startup founder who has to ensure the business survives to fight another day, especially coming from an era of relative bonanza in which companies were recklessly buying growth at all costs and burning lots of cash to get there. WeWork⁶ may forever remain as the poster child of that gold rush: SoftBank slashed its pre-bailout valuation by more than 80% to below $5 billion, a dizzying drop from WeWork’s $47 billion valuation in January. The fund basked under the premise that the “brute force” of capital can let a start-up scale so fast that no rival can catch it. But if the spending outruns the money coming in, that can create “its own variety of brute force”. As another SoftBank-backed CEO, Uber’s Dara Khosrowshahi, put it loud and clear in a recent earnings announcement: “The era of growth at all costs is over.”
As Crunchbase reports, against this backdrop of unprecedented funding amounts in the last 24 months–with more than 25,000 startups funded annually–we face the biggest downturn since the financial crisis of 2008.
First, volatility in the stock market and declining multiples is inevitably playing through to the private markets. Assume that fundraising velocity will slow from the fast pace we’ve seen as non-professional investors flee the market and professional sources of capital take time to process the new macroeconomic environment. Valuations will likely see pressure from multiple angles and some companies will not be able to attract additional investment at any price. Do not be one of them, as more runway in this environment could mean the difference between life and death for your business and it may make sense to take on additional capital.
As a leader of your company, go beyond pure equity and seek other liquidity sources. It is unlikely you will be able to get a bank loan or line of credit without heavy collateral, but make sure that you apply for public grants, subsidies and stimulus programs. Additionally, there are several ways in which you can deduct or monetize tax incentives linked to R&D and media creation expenditures which are complex to operationalize without prior experience, but particularly in Spain can turn into a substantial benefit for the startup’s financial obligations. There are reputable advisors that can guide you, such as the guys at Asset and Capital Advisors who have even created a free app called iRocket that helps explore your options right from your pocket. Many entrepreneurs neglect to pay attention, to their detriment, but this is the time in which a good CFO must shine and squeeze out every single dollar out of the company’s capital structure. Get one now if you don’t, even if all you can afford is a part-time, pay-per-success basis.
Bet on a Gradual Recovery
Second, do not bet on a quick, V-shaped turnaround. The impact of the crisis has been different depending on the sector, and so will be the recovery, but count on at least a year of adverse market conditions when you craft your financial contingency plans. I shiver when I hear travel-tech startups counting on being “back in business” by July. Now is a time when it really pays to be realistic and plan for worse before it gets better.
Freeze your marketing and advertising budget. Re-negotiate compensation and conditions with your employees, particularly at the executive level since these most dramatically impact the balance sheet, and adjust your workforce as required. Take tough decisions to reduce your burn rate and increase your runway now before it’s too late for action.
Try to find as much help as you can from professionals networks. Several entrepreneurial groups are mobilizing to provide peer-to-peer support during these difficult times. For Spain in particular Startup Valencia has proven the maturity and thought leadership of the valencian ecosystem by raising to the challenge and organizing Help4Startups, a nation-wide initiative that Conexo Ventures is proud to collaborate with. I recommend that you register regardless of your current circumstances, whether you are a founder struggling to cope with the events or on top of your game and able to provide resources and mentorship for others; this service is completely free. Also do your own research as there may be other support communities closer to your geography or vertical.
In magnitude of impact, the most affected sectors have been travel and hospitality, leisure retail (including restaurants), and manufacturing. The impact is less severe in essential retail (including supermarkets and banking), financial and insurance services, and consumer packaged goods. Out of these, the recovery will be fast in manufacturing and consumer goods, moderate across retail, but unfortunately slow in travel and hospitality, where it may take beyond the Christmas season to have reasonable occupancy rates at hotels.
Startups should plan accordingly, but also remain innovative and leverage new opportunities to fulfill costumers’ needs. For instance, the crisis has positively impacted at-home food delivery and online retail. Can you bring your product on-line or at-home? Can you mediate and bring these clients closer to traditional businesses, unprepared for the status quo? Check the success stories of We Are Knitters in Spain or MyYogaTeacher in the USA: this California-based startup is building a marketplace to connect yoga and meditation teachers from India with American customers (SAM of 80M interested adults) for personalized 1-on-1 sessions or group sessions. In response to the Coronavirus pandemic myYogaTeacher launched free, live online group classes… and had a sustained 150X surge in new members with a dramatically reduced CAC. Way to go!
Accelerated Digital Transformation
I always like to remember that a great crisis is also, always, a great opportunity. The great recession of 2008 catapulted into stardom companies such as Groupon, Uber and Airbnb, which knew how to offer the most adequate product at the right time. Likewise, the current situation is generating a demand upsurge in remote work and collaboration tools, datacenter operations (as more and more corporate processes are migrated to cloud infrastructure) and cybersecurity.
What is the underlying effect here? A tremendous push towards digital transformation; that is, the online enhancement (and in several cases reduction or outright replacement) of human interactions that have been traditionally performed offline.
Aligned with that trend it seems that technology, telecommunications and media are the sectors positioned to be the great winners of the Coronavirus crisis. This grassroots intuition is widely confirmed by looking at the evolution of the financial markets in the past weeks. Technology stocks in the NASDAQ have already recovered two thirds of their pre-crisis value, while most other categories languish at the bottom. This is something unheard of in the prior corrections of the Dot Com Crash (2000), the Great Recession (2008) or the Big Market Selloff (2015) and extremely significant for our industry: for the first time, high tech is behaving as a defensive asset in times of turmoil.
The digital transformation mega-trend has been with us at least for the last 20 years, and while it has radically re-shaped some sectors like media, dating and finance the progress has been much slower in others that due to market or regulatory conditions were able to drag their feet. Now, as the adaptation to online mediated labour, product and service markets becomes one of the key factors to survive in an increasingly competitive landscape we can expect a second “digital transformation rush” that will open many new industries to disruptive innovation.
That is why today more than ever, we at Conexo Ventures are convinced that the conditions are aligned at a strategic (focus on Saas platforms and artificial intelligence solutions that increase productivity through automation), geographic (orientation to the markets with the highest tech demand and capital liquidity) and tactical levels (supporting our existing portfolio and continuing to invest in new deals through the crisis) so that we can achieve a resounding success in boosting Spain and Portugal’s presence in the global innovation landscape.
Suppressed Share Economy
I did not want to close this article without discussing the impact of the illness on the share or “gig” economy. Precisely those companies that we mentioned as the great winner in 2008, Uber and Airbnb, are among the most affected by the crisis as people have to stay at home.
Some may rejoice in that fact, as lobbies and regulators in very different geographies have been for years trying to curtail the explosive growth of the gig economy, accusing it of “unfair competition”, “degradation of service” or, even worse, “trash employment disguised as freelancing”.
But the reality is much more complex and it can negatively affect many of those that are at the highest risk for Coronavirus-related unemployment. As you may remember, the term “share economy” appeared in the mid 2000’s as a new business model in which individuals monetize their spare capacity (empty room at home, car off business hours, byproducts of hobbies and crafts) through digitally mediated platforms.
What started as a homogeneous progressed into radically differentiated sub-categories and it is fair to say that the gig economy today is what broadband was during the 90s; a key enabling innovation upon which deep network relationships and opportunities are generated that do not necessarily correlate with lower incomes. The following graph can give you a sense of how diverse the average monthly income can be depending on the profile or “on-boarding requirements” across platforms.
I am worried about effects of the Coronavirus on this landscape not only during the immediate crisis, but also long-term. The share economy has been always highly dependent on mutual human trust beyond the traditional proximity networks: after all, it was total strangers that delivered lunch to us, drove us to places, and hosted us into their bedrooms. Conversely, anonymous guests consumed these services. What is going to happen moving forward? Will social distancing affect our willingness to engage with others? Will we be more reluctant to stay at a private apartment lest their cleaning habits are less than optimal? Is this an opportunity for established businesses to make up for the lost ground through higher standards?
That could be the case, but I am confident that the illness will also open up many other untapped venues for innovation, even at the gig level. Let me close on that higher note by mentioning Nannyfy, a “Uber for Nannies” launched in Spain. Albeit catering to home workers, one of the sectors that has been most devastated by the crisis, the company has been wise and agile enough to re-orientate their service offering by having nannies care for children through video-conference (again, digital transformation). Just in the month of March revenues have skyrocketed to levels higher than those during their entire prior year.
Congratulations, Claudia de la Riva and team! I wish everyone who is now struggling will be able to raise up to the challenge of reinventing themselves. Please stay safe, stay strong and stay positive!
[1] Spain was one of only a few major European countries to remain neutral during World War I. Unlike in the Allied and Central Powers nations, where wartime censors suppressed news of the flu to avoid affecting morale, the Spanish media was free to report on it in gory detail. News of the sickness first made headlines in Madrid in late-May 1918, and coverage only increased after the Spanish King Alfonso XIII came down with a nasty case a week later. Since nations undergoing a media blackout could only read in depth accounts from Spanish news sources, they naturally assumed that the country was the pandemic’s ground zero. The Spanish, meanwhile, believed the virus had spread to them from France, so they took to calling it the “French Flu.” (Source: History.com)
[2] USA surpasses Spain with 764,265 vs 198,674 cases, which is a 3x ratio on a 6x ratio of population. Italy follows closely behind with 178,972 cases. (Source: WorldMeters)
[3] Otherwise a laughable Hollywood flick. “Get that monkey!” Seriously? Soderbergh’s Contagion approaches the subject of a global pandemic threat in a much more mature way.
[4] Check the United States Congress’ joint economic committee report on Long-Term Trends in Deaths of Despair. (Source: US Senate)
[5] The suicide rate over the next decade of economic depression (1930–1940) stayed at a terribly high 15.4 per 100,000, until the national emergency of World War II, when it declined significantly. (Source: PsychologyToday)
[6] The company was a property business merely masquerading as a tech group. Real-estate veterans doubted its business model: past attempts to take on the risk of subletting long-term leases to tenants who could walk away had ended in tears. In 2018, the FT crunched the numbers and concluded that WeWork was worth closer to $3bn than the $20bn valuation of the time. (Source: Financial Times).
