The Greatest Startup Accelerator?

COVID-19 could trigger a wave of startup expansion

Mauricio Prieto
May 23, 2020 · 5 min read

The jury is still out on the type of recovery ahead. Author and entrepreneur Steve Blank recently went beyond the current situation beyond the usual letter shape outcomes:

This is not a recession it’s a mass extinction event for a good number of businesses and industries — Steve Blank

A few studies offer evidence that volcanic eruptions could very well have been the cause of the extinction of dinosaurs. A Far Side cartoon depicts the then dominant dinosaurs confidently before some volcanic eruptions making fun of some lowly creature, while cluelessly unaware of their own eventual demise in a world that was about to change dramatically.

A Far Side cartoon, by Gary Larson

Under this mass extinction argument, startups (as a standalone category) could be particularly well positioned to come out from this cataclysmic event relatively better than others because some of the characteristics needed to survive and thrive under such conditions are inherent to them. Let’s go over a few of these.

Silicon Valley entrepreneur Steve Blank (and one of the key individuals behind the lean startup movement) recently wrote a five-day playbook to help CEOs of cash-flow negative startups understand what they must do to survive:

Startup survival = (speed of understanding) x (magnitude of pivots and cuts) x (speed of execution)

Startups are generally better built for speed and agility than larger companies. Their decision making process is faster and they are bound by fewer constraints than larger companies with higher fixed costs and fixed assets.

CV19 will have an effect on how consumers behave and what they value when making decisions. In unusual times, “business as usual” will translate into no business. Companies will have to reevaluate all their previous set of assumptions. With fewer legacy constraints, startups can better adapt or restart in a new post CV19 environment.

And businesses that start from scratch have the luxury of looking ahead without past baggage holding them back. In travel for example, one of the hardest hit sectors in this crisis, some of the category’s leading companies were founded in the financial crisis of 2008 / 2009: Airbnb (leader in alternative accommodations), GetYourGuide (leader in tours and activities), Vacasa (leader in vacation rental management), SilverRail (leading rail aggregator), Adara (leading travel data media company).

CV19 could accelerate the rate of collaborations between startups and corporates for two main reasons.

  • Corporates will have gone through rounds of layoffs that could tilt the “build vs buy” tradeoff towards the buy side.
  • Corporates will have a more urgent need to bring about higher levels of innovation to adapt to a new environment.

What 2 months ago seemed like a non-urgent long term option, could become an immediate strategic imperative today. Startups such as Plazah (Personal Commerce solutions for retailers and brands) or TroopTravel (helps corporates take informed decision when planning and booking any corporate group travel, meetings and events) know this first hand as they sign up more corporate clients in the past month than in the previous 12 months.

Three of the main reasons why people don’t start a new business are:

  • they like the security of a steady income
  • they fear failure
  • they are passionate for their current jobs.

Unemployment rates are expected to rise to historic levels worldwide. Many talented professionals with deep connections and profound subject know-how are now out of a job, and this shakes their risk tolerance parameters. There are countless of arguments for indefinitely postponing the idea of starting a new venture while working at Airbnb, but the perception of risk changes dramatically when the alternative to starting a business is unemployment. As the proverb goes, necessity is the mother of invention. This also is a good opportunity for startups to access to a talent pool that previously would not have been available.

Physical presence in the office is becoming an option for many larger companies, in spite of what their natural inclinations would be. Startups have the upper hand in their ability to adapt to flexible work. Pre-Covid19, 39% of remote companies had fewer than 25 employees, and 90% of entrepreneurs supported remote work. A transition to remote work and a distributed workforce will be a tougher road for larger companies than for startups, many of whom have been operating as such since launch.

This dynamic will also accelerate what Steve Case calls “the Rise of the Rest”, which refers to the increased innovation and opportunities outside the traditional hubs such as Silicon Valley. The increased ability of entrepreneurs to launch startups, get funded and grow regardless of their physical location can lead to a surge in startup creation.

This is another trend that has been accelerated by the current crisis. We’ve seen the graph about eCommerce’s share of retail sales. In two months, it jumped 10 percentage points, as much as it had increased in the previous 10 years.

Elaborated with data from the US Department of Commerce and ShawSpring Research

This forced experiment has moved consumers to adopt new channels for communication, sales, productivity, etc…. These shifts could be temporary, but there is some data pointing towards consumers not returning to their old ways even after restrictions are lifted.

52% who shifted to digital grocery shopping say they won’t go back to their old ways of shopping. And 60% of consumers who shifted to digital to shop for things other than grocery items say the same — PYMNTS survey

This digitalization shift could favor startups in their direct to consumer initiatives and also as vital partners for corporates needing to adapt to new consumer behaviors.

This crisis is having a terrible impact on most companies regardless of size, and by no means am I implying that startups in general will come out strengthened by this. But if we consider startups as a “category”, I am optimistic that after CV19, they will find more willing consumers to sell to, more willing corporates to collaborate with, and business dynamics for which they are well suited for.

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