This article was originally written and published in collaboration with dGen for their two-part series (part 1, part 2), which surveyed some of the top blockchain investors in Europe. Given the importance of precautionary measures in times of crisis, Manuel Trojovsky and Dr. Georg (Juri) Stricker have summarized our points below.
The current COVID-19 crisis has shaken up the world and we have not yet grasped the true scale of it. What we can say with certainty, however, is that the coronavirus is a global threat to the economic situation of companies, especially those which didn’t have the time and the resources to build up reserves, such as many startups. In the past four weeks alone, the number of unemployment claims in the US has soared to more than 20 million, while Germany expects more than 2M people to apply for government-subsidized work reductions called “Kurzarbeit”.
Furthermore, people all over the world experience firsthand how essential it is to have a solid digital infrastructure, be it in the area of team collaboration, transparent supply chains, trustworthy news and information, such as the unhindered exchange of medical research results. Therefore, we expect the coming years to be heavily focused on infrastructure. From telecommunications and internet protocols to supply chain and mobility, the underlying infrastructure is being re-designed and re-built in order to fit a fully digitized future. As the internet has long grown beyond its initial communication capabilities, it has evolved into a seamless, holistic environment that transcends today’s boundaries of information management and storage. Enabling safer, faster, and more reliable data and information flows, this paradigm shift will set the foundation for a wave of new ideas and business models. Many of these revolutionary components are already being developed today and blockchain technology is at the heart of it.
However, currently for most startups it is necessary to tighten the belts and take various measures to navigate safely through the current crisis. Therefore, we have put together a list of actions that will be of help in the current situation.
Cash is king
In the current environment, cash is king. Get an overview of your costs and runway today. If necessary, take immediate action and reduce cash burn to conserve funds. Bear in mind that cash is like oxygen — you hardly realize it until you’re running low. Nobody knows how this plays out, so go through all conceivable downside scenarios asap, using realistic stress assumptions. Come up with back-up or emergency plans, especially with a view to preserving liquidity (cost-saving measures, generating or front-loading revenues via discounts or special offers). Keep an eye on the runway.
Further Readings: How To Keep Your Company Alive — Observe, Orient, Decide and Act, Steve Blank, Mar 29th 2020
Maintain revenue generation
Crypto is volatile, so are revenues. For many people, the financial situation has changed overnight, which inevitably has implications for blockchain and crypto startups too. The current risk-off mode might entail a change in recurring revenues (e.g. consumers buy less crypto through fiat on-ramps and exit trading in a down market). Be swift to react to the scenario and anticipate market trends. For instance, DeFi apps or crypto lending platforms are offering attractive rates in the current low-rate environment. If your company has sufficient liquidity, try out new business models to speed up adoption and revenue generation at a later stage thanks to lower customer acquisition costs (e.g. “freemium”).
Further Readings: SaaS companies — How to reduce churn related to Covid19, Amélie Faure, Mar 20th 2020
Assume lower valuations
In light of the uncertainty and the more challenging backdrop in financial markets, funding conditions are likely to become less favorable. In this context, previous backers are more important than ever, in part because VCs often cut back on investing, and re-focus on existing portfolio companies instead. It is therefore critical to remain in close contact with your network and other investors, even if it’s just for the sake of getting an overview of what’s going on. Looking ahead, assume lower valuations and smaller rounds for some time when planning ahead.
Further Readings: What Could the Venture Market Look Like in the Coronavirus Era, Tomasz Tunguz, Mar 12th 2020
Talk to the team
Make sure everyone is well-off, particularly during times of isolation and working from home. Help your team members and staff — they will be grateful in the future. Many things are up in the air in the current situation. Give regular updates and communicate clearly — don’t keep your team guessing. The current environment might also be an opportunity to look for key hires or fill vacant positions more quickly.
Further Readings: Communicating Through the Coronavirus Crisis, Paul A. Argenti, Mar 12th 2020
Keep an eye on state aid
Closely watch public support programs that ensure startup survival launched by governments across the EU (e.g. EIF, KfW in Germany, local governments) and check if you’re eligible. In countries like Germany, you might qualify for state aid in the form of short-time work schemes like “Kurzarbeit”, an initiative first used during the financial crisis of 2008. This allows employees to work shorter while receiving up to 67% of their base salary to keep their jobs.
For European countries: Guide to support measures for startups affected by coronavirus, Marie Mawad, Mar 18th 2020
For the US: Financial Assistance for Businesses Hit by the Coronavirus Crisis, Gabrielle Bienasz, last updated Apr 10th 2020
Startups that are currently raising or are planning to raise in the time of crisis
Adjust your business model
The Coronavirus is actually multiple crises in one. Not only does this mean that the current market is different than the one you have planned for. It also might accelerate certain developments in a way that will substantially change the post-crisis market. Adjusting your business model and the go-to-market strategy accordingly is key to be prepared.
Further Readings: Creating Shelter in the Storm: Pivoting Your Business in Response to COVID-19, Rob Shelton, Apr 07th 2020
Further Readings: Customer Discovery In the Time Of the Covid-19 Virus, Steve Blank, Apr 07th 2020
Expect less funding
When market predictions are tough, people tend to postpone financial decisions or make them conservatively. The consequence is less money available to fund risky ideas and a longer time horizon to fundraise. In our experience, the size of a funding round might decrease by 30%-50%. The time horizon itself mainly depends on the perception of the crisis and the overall clarity of the response strategy. If the impact of the crisis is perceived as something short-term, investors might just postpone all financial decisions to the post-crisis period. If, however, the impact is long-term but the solution can be planned with higher certainty (the easing of the shutdown, potential breakthroughs in vaccine research) decisions might be made earlier despite the problematic situation.
Further Readings: How Covid-19 Could Impact Seed-Stage Startup Investing, CBInsights, Mar 20th 2020
Strengthen the core team
The crisis may offer new opportunities. As the money dries up and unemployment rises so do opportunities increase to hire good people for less money. This is the time to identify your unique characteristics and establish a stable core team with sound financials.
Further Readings: The Complete Team — How to Build a Great Startup Team, Tristan Kromer
Further Readings: Startup Team Building — Right Team / Right Market, Tristan Kromer
Look out for funds at the start of their investment period
Funds that have already deployed bigger chunks of their capital or have established a substantial portfolio will be busy supporting their current startups. It is less likely to receive funding from them. Instead, look out for funds early in their investment period who are not burdened too much with their current portfolio. Additionally, angel investors can support you with a bridge round, in particular, if you are willing and able to lower the valuation.
Further Readings: New European Tech VC Funds, Quarterly post and newsletter
To conclude, we expect turbulent times to come our way. Still, there won’t be ‘a going back to the way it was’. On the bright side, the new future holds many opportunities for those who dare. In the meantime, by focusing on the essential aspects of our business, planning ahead, and using resources more effectively, we will experience a rebound in productivity and efficiency. The world is not standing still, it is just running more slowly. This gives us valuable time to reassess and rethink outdated processes.