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Founder survey reveals impact of COVID-19 on early stage startups

Since the COVID19 crisis hit, founders have been bombarded by advice that is often conflicting: show growth but show profitability, cut expenses to swiftly but aggressively pursue new opportunities, this is a great time to start a company but a terrible time to raise money.

The reality is this is probably the hardest time in recent history to be a founder. It takes more grit than ever. But right now, a lot of innovation and hope are coming from people with entrepreneurial mindsets who see a problem and dare to go solve it. We want this to continue.

In order to better support early stage founders, we decided to conduct a new survey on what challenges they are facing now in this unique moment. The goal is to reconsider how we support founders today, because the reality is they are the engine of the tech ecosystem. Without them, the world we want to exist won’t be built.

One year ago, we published research on founder sentiment and fundraising in the Jane VC Early Stage Founder Survey. The results revealed that inequalities in tech start at the seed stage. For every $1.00 raised by men, women raised an average of $0.38. Black women raised just $0.02.

This April, we refreshed our survey of early stage founders, repeating questions about founder sentiment and adding new ones about the impact of COVID-19 on their businesses. This is one of the largest and widest-ranging surveys of early stage founders across the US and Europe, and it reveals their specific needs at this unique moment in time.

For the survey, we interviewed 247 founders in April 2020, 89% of whom are female. 73% of these founders live in America, while 27% live in Europe or the UK. 63% of these founders identify as white and 67% of them are ages 30–50. 89% of the founders are CEOs, and 41% are pre-seed and 33% are seed stage. 43% are B2B, 24% are B2B2C, and 33% are D2C. The average amount raised to date is $1.3M.

Below is a summary of our most notable findings, which we hope the tech community at large can use to help us better support founders.

1. Early stage startups are faring better than expected and adapting quickly to our new reality

Our assumption going in was that the impact of COVID-19 on startups would be very negative. Surprisingly, 52% of early stage startups don’t expect the current macro environment to negatively impact their business.

What is behind this? It could be the industries they are in or the fact that they are nimble and able to quickly adapt their businesses. 36% of founders actually expect a positive impact on their overall business. And a fifth expect revenue to actually increase.

In contrast, 48% of founders surveyed expect the current macro environment to negatively impact their business. This pandemic has certainly affected everyone in the business world, but this bifurcation of impact is stark.

Astonishingly in such a short period of time, the majority of startups surveyed have already pivoted or are considering a pivot in response to the crisis. 50% have already pivoted, and another 12% are considering one. Early stage startups are incredibly nimble, so they are better positioned than later stage companies to reorient themselves to address opportunities that emerge in this moment.

2. Founders: what specific actions are your startup peers taking?

Our hope is that by arming founders with information about what other startups are doing, it can help them make faster and better informed decisions. The median runway for the startups we surveyed is only five months, so buying time right now is critical.

EXPENSES: 81% of founders surveyed have already taken swift action to cut costs. The biggest cuts have been giving up office space or re-negotiating rent (40%), slashing marketing budget (39%) and cancelling software subscriptions (34%). This last stat underlines an important point for B2B startups: make sure you’re selling a painkiller, not a vitamin.

TEAM: While layoffs from later stage startups have been all over the news, the picture is different at the early stage. Teams are typically small and there isn’t much excess headcount to begin with. 41% of startups aren’t making any changes to their teams. The most common actions taken by startups that need to cut headcount expense are hiring freezes (32%) and reducing salaries (21%). So far, layoffs and furloughs have come into play to a lesser extend.

Paycheck Protection Program (PPP): More than half of the US-based founders applied or are planning to apply for PPP funds, with 71% applying where they currently bank. Men were more likely than women to apply for the PPP (50% of men vs 43% of women). However, in the short time that’s passed since we conducted this survey, the PPP has already come into flux, and it remains to be seen whether funds will remain to support startups or anyone else that has not already seen funds distributed to their account.

A number of founders did not apply on moral grounds, an issue that leaders of large companies and institutions are now being forced to publicly address.

One female founder commented, “I decided to rescind my PPP loan application. The primary reason was the ethical issue of receiving funds ahead of those who need them much more than I do.”

CHALLENGES OUTSIDE WORK: Across the board, founders are stressed, and not just about business: 55% are concerned about their personal finances and 53% specifically about COVID-19. A third are spending more time on housework than ever before, and a quarter are taking care of children while working at home. It’s an intense time for entrepreneurship and innovation.

One female founder told us, “Even our small team has been impacted in stressful ways: one employee got the virus, one employee’s spouse lost her job due to layoffs, one employee had to self-isolate intensely due to pre-existing conditions & I’ve had to learn to manage with the kids home from school. It’s definitely more stressful than usual for everyone right now.”

Another founder described, “It literally *feels* as though my personal and professional world has crumbled all around me.”

The least of their worries? Enabling remote work for their teams and keeping the momentum around productivity. We imagine there are two reasons for this. One, many startups were already adept at remote work. Two, born in the digital age, they’re not scrambling to figure out new tools like many traditional office-based companies. Despite personal and professional challenges, these startups embody the future of work as they power forward virtually.

3. Heightened disconnect between founders and investors

The biggest concern on founders’ minds is fundraising. The great majority — 83% — are fundraising now or expect to later this year. Yet 68% fear fundraising opportunities will dry up.

While fundraising is by far the top priority for startups, funding startups doesn’t appear to be the top priority for most VCs. Nearly three-quarters of founders have already noticed a change in investor behavior over the last few months. Investors are taking longer to respond, pausing fundraising activity or focusing more on their existing portfolios. This tension has always existed, but has gotten more heightened by the crisis. At a time when founders need more capital than ever, they are hearing that investors are pulling back.

One female founder said, “From what I’ve seen across many founder friends, there are two types of VCs: 1) Freaked out, putting pressure on companies and 2) Reassuring, supportive, helpful VCs rolling up their sleeves to help with new strategies etc. Neither are investing. All are focused on [their] portfolios.”

Another female founder commented, “My challenge is knowing who is really still funding startups. My time is much more precious with family/home obligations and don’t want to waste it with funds who say they are still interested but aren’t.”

4. Since last year, gender inequity hasn’t budged and founder optimism has dropped dramatically

One thing that hasn’t changed since our 2019 survey? Sadly, we’ve made little headway in closing the gender gap in startup funding.

Last year’s survey revealed that female founders were raising $0.38 for every dollar male founders were raising. This year, that’s shifted ever so slightly to $0.39. Women are still undercapitalized from the very beginning of their startup journey, which puts them at a significant disadvantage.

One of the female founders told us, “In conversations with investors, I reach a point in my pitch when they realize the potential for my business is as big as Uber and Lyft, if not bigger. And then they look at me and say with a confused puppy dog face, “YOU thought of this?” Because I don’t LOOK like someone who could have thought of this HUGE great idea. I should get insulted, but it actually confirms my passion and fuels my focus.”

Amidst all this change and turmoil, founder sentiment is suffering. Last year, 56% of founders felt optimistic about their ability to raise much-needed capital. This year, that number has plummeted to 26%.

The sentiment shift extends beyond the ability to raise capital. One year ago, 52% of founders felt optimistic about the general environment for female entrepreneurs. This year this stat dropped significantly, with only 34% feeling optimistic.

Call to tech ecosystem: put founders first and don’t let diversity fall by the wayside

Now that we’ve gotten in the trenches with early stage founders, you can see the depth of the challenges ahead. What can the tech community do to help better support founders now?

First, we must not let diversity fall by the wayside. This is a harder time than ever before to be a founder, particularly an underrepresented founder. Crisis has a way of exacerbating privilege. We’re hearing about this so-called “flight to quality” and worried that people tend to revert to hiring, backing and choosing people like themselves, within their tight networks.

Yet the data remains clear: diversity drives superior outcomes as measured by revenue, exits, and overall returns. Leveling the gender and racial playing field in tech funding isn’t just good business, it’s smart business. As one founder said, “we need more VCs to step up and say, Yes I am investing. And I do NOT need a warm intro.”

Second, and most importantly, we must remember that it all comes back to the founders, and everything the industry does should be in service of them. Can we as investors push ourselves to respond faster? Can we be more transparent about whether we are investing and how our criteria has changed post-COVID-19? Can we take more meetings without warm intros? Can we push ourselves to adjust our processes and strategies to be relevant now, just as founders are doing?

There’s a place for advice, office hours, webinars and new programs promising to help, but more than ever founders need empathy. They need transparency. They need optimism. They deserve a fair shot.

We believe the founders of the next decade will look fundamentally different: more female, more diverse and more distributed. We back founders based on their tenacity and ambition, not their pedigrees or who they know. Our vision is an equal opportunity tech ecosystem.

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January Ventures

January Ventures

January Ventures (previously known as Jane VC) invests early and opens doors for the visionary founders of the future.

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