6 Things Every Startup and Investor Needs to Know Right Now
#1 — 50% of startups have less than 6 months to live
Right now, startups and investors around the world are at panic stations trying to figure out how to survive this unprecedented situation and unfolding financial catastrophe.
Of course, startups and investors in some sectors are enjoying an unprecedented and unexpected boom time. As I have previously noted, tech ventures exploring alternative cleaning products, remote collaboration, and low-cost trading platforms are all seeing stratospheric year and year growth and appearing to have little but bright futures ahead.
Yet these success stories are ultimately few and far between. For most startups and early-stage ventures, the high-risk nature of short runways and rapid funding cycles makes them particularly vulnerable to bear markets and prolonged periods of economic uncertainty.
The Default Startup is Default-Dead
Entering 2020, a vast number of startups were, as Paul Graham likes to call them, default-dead. That is, without raising cash, these businesses would run out funds and be forced into bankruptcy. Put bluntly, they were simply not profitable for the foreseeable future.
As Crunchbase notes, the post-Great Recession bull market of the 2010s and with it, its flood of free-flowing capital, meant that many startups could skate by, unprofitable for years at a time, simply topping up reserves at each new round of funding. It is in this manner that Uber, WeWork, and Postmates have been able to consistently post staggering losses quarter after quarter, year after year, while somehow still remaining solvent.
Conventional wisdom in the world of VC’s holds that most startups should hold somewhere between 12 and 18 months cash in the bank in order to survive between funding rounds. But in the current crisis, conventional wisdom can, for the most part, be thrown out the window. With revenue streams stalled and uncertainty paralyzing markets, many startups and small businesses require critical and imminent action to stay afloat.
With this in mind, Slush, the not for profit movement for advancing attitudes towards entrepreneurship, recently undertook a survey of 260 startups and 140 investors in order to uncover exactly what is going on in the startup and investment ecosystem in reaction to the ongoing pandemic.
Drawing on some key highlights from the survey, and backing up these findings with further evidence and recent reporting, the following outlines 6 insights on the current state of play for startups and investors.
1. 50% of startups have less than 6 months to live
According to Slush’s findings, over 40% of startups have seen their runways shrink dramatically — meaning that without new funding, half of all ventures will run out of cash within the next 6 months unless they can quickly secure a new influx of funding.
Obviously, this raises a serious cause for concern. As Steve McDermid, Corporate Development Partner at A16Z advises, startups should always give themselves “plenty of cushions when assessing your cash runway,” as funding rounds, in many cases, can drag on much longer than expected. A 6-month runway is far from the 12 to an 18-month safety net that conventional wisdom would implore of most startups.
Yet all is not lost for these short-stacked ventures. As the research also points out, common sense and resilience are starting to kick in — the camel is the new VC darling. Around 35% of startups claim that they are preparing to temper their short-term ambitions and downscale their funding plans for the remainder of 2020 — preferring to rein in spending and directing efforts towards stabilizing their core offering and striving for profitability, rather than plowing ahead at any cost with foolhardy growth and development plans.
2. Existing networks and the ‘old boys club’ are increasingly important in securing funds
Founders with previous experience in securing startup funding are much more confident than first-time founders in securing funding over the remainder of 2020.
Repeat founders are 20% more likely to either see no change to their funding pipeline or to be confident that they will be able to raise more than they had initially planned. This indicates that for startups, being able to call on existing networks — that old adage of ‘it’s who you know’ — has taken on even greater importance.
This reliance on existing networks and ‘old boys clubs’ is being further compounded by investor sentiment. As Ed Zimmerman recently noted in Forbes, most VC’s will be narrowing their focus over the coming few quarters to existing portfolios and trusted partners. While Ross Fubini, of XYZ Venture Capital, has gone so far as to advise founders that “talking to people that already know you” should be their number one priority at present — as he explains:
“It’s really hard to do new investments. I am conducting one solely on Zoom, but I know all the investors. It’s going to be very hard to do things with people you do not already know.”
Jean de la Rochebrochard, partner at Kima Ventures, told a similar story to Sifted, noting that [pre-coronavirus] “we were passing 20% of our time with our portfolio, and 80% of our time on new deals. Now we’re passing 80% of our time with our portfolio, and only 20% on deal flow.”
All of this suggests that first-time founders, or those with few existing connections, are going to find themselves in an unforgiving landscape for at least the next couple of quarters.
3. Valuations will come crashing down
Over 90% of investors are expecting valuations of early-stage ventures to fall by greater than 20%, with a majority expecting an average fall of somewhere between 20%-40%.
Similarly, Sifted reports that valuations are down between 10%-40% since March, with later-stage startups generally noted to be among the hardest hit.
As Matt Clifford, co-founder of Entrepreneur First, said recently in an interview with Protocol, “I expect valuations to fall 30% to 40%, even in seed, and at least that farther up the chain.”
In other words, the founder-friendly days of the rollicking past 9 years are over — at least temporarily.
4. Pivot! Pivot! Pivot!
Startups and investors alike are pivoting in an attempt to tackle the uncertainty unleashed by the pandemic head-on.
Startups across the board are either shifting focus or expanding their product offerings. Regardless of company size, more than half of all startups have changed their product offering since the pandemic struck — although the smallest and youngest startups have, predictably, been the most nimble.
Instructively, negative demand shocks also appear strongly correlated to pivots, with the industry sectors most affected by falling demand showing the greatest willingness to adapt and change focus.
Those investors still looking for new investment opportunities are also showing a greater willingness to shift focus, with almost 80% admitting to seeking out industries benefiting from the pandemic, such as health and wellbeing, education, and e-commerce and online marketplaces.
5. Employee onboarding is on-hold, but layoffs are rare
As to be expected in any economic crisis, new hiring has largely been put on hold. Only 8% of startups surveyed by Slush are preparing to accelerate hiring over the coming months.
Otta, the UK-based startup hiring platform has reported a more than 40% decrease in new job vacancies since April. While Nina Wicki Olsen-Stryhn, of Nordic recruitment platform the Hub, has noted a 25% year on year decline in startup job openings across March and April.
On a positive note, however, layoffs have been limited with only 83% of startups planning on doing whatever they can to retain current staff.
6. D2C companies are emerging as winners
Sales have been impacted across the board. Fewer than 10% of all startups surveyed reported sales being unaffected by the pandemic.
Despite the overall effect on sales being negative, some business models are faring better than others. B2B businesses, in particular, have been hit the hardest. According to the Slush data, B2B startups are 25% more likely to be negatively affected than B2C ventures.
The most important factor influencing sales growth or decline, however, appears to be the type of distribution model used. Given the tremendous impact that lockdowns have had on physical shopping space around the world, startups without any form of D2C distribution have been uniformly negatively affected by the pandemic.
However, startups which have been able to incorporate at least some element of D2C distribution have, on the whole, been much more likely to report positive sales affects over the past few months — and amazingly 50% of pure D2C startups have actually seen sales growth since the beginning of the pandemic.
Final Thoughts
The road ahead will be full of uncertainty for both startups and investors. But the more informed we all are, the better our collective decision-making will be, and the quicker we will navigate the uncharted waters before us. Remember:
- Ensure your startup has enough cash to make it through — runways are greatly shortened, so act fast.
- Call on existing networks and trusted partners — they are in the best position to help.
- Valuations may drop — although this may also be the market pulling back in the balance of power between founders and investors.
- Startups and investors alike must embrace change and be prepared to pivot wherever necessary.
- Now is the time for startups to consolidate — so a pause on new hiring is only natural. The most important thing is that layoffs remain rare.
- Embrace direct-to-consumer distribution wherever possible — it is only returning positive results.
While far from comprehensive or foolproof, the insights noted in this article and the data contained in the full Slush survey of startups and investors, will hopefully provide some guidance on what lies ahead.
