2020 has been a tough year for any company, and startups have certainly not been spared. According to Startup Genome, demand has cratered due to the coronavirus pandemic, with 72 percent of startups experiencing revenue decrease since December 2019, and 38 percent of startups reporting staggering revenue drops of 40 percent or more. This has forced the sector to downsize, with 60 percent of startups either reducing salaries or laying off employees, fueling a fivefold increase in startup layoffs between March and May 2020.
Venture capital has not fared much better. At the onset of the pandemic, a significant portion of venture funding evaporated into thin air amidst the initial wave of job losses and financial stagnation. Whether firms did not have committed capital or their limited partners (the pension funds, family offices and corporate investors who support VC funds) backed out amidst broader financial uncertainty, the result is dramatically less investment capital available to startups: today, 4 out of 10 startups have 3 or fewer months of capital runway—a 29 percent increase from December 2019.
Given the picture above, it may seem like 2020 is the year that finally brings a historic decade-long startup run to a close. But these gloomy figures belie a much more optimistic reality. Far from being the death of the startup, 2020 will be a launching pad for another wave of startup growth and innovation. Despite the year’s setbacks, new companies are still being founded, new investments are still being raised, and startup valuations continue to grow. What do this year’s unlikely startup success stories have in common? Resilience.
The startups managing to weather (or even win during) the pandemic are those that have been able to adapt their operations and outlook to the earth-shattering nature of these times. In order to keep moving forward, resilient companies are becoming craftier in the ways they use their capital, more committed to their core mission and more innovative in their strategic orientation. The coronavirus has forced startups to adapt and be better than they have ever been before, often in ways that don’t necessarily appear in the key metrics tracked by CEOs and investors.
First and foremost, every startup management team has been forced to take a sober look at how they use their most perishable resource–cash. In 2019, investment capital was so readily available that it was not uncommon for startup founders to plan on raising capital every 6-9 months. Because the next fundraising was always right around the corner, these startups rarely kept much cash on hand. These days, however, it is not uncommon for startups to raise enough capital to last them 18 months or more. Our VC partners are targeting 24 months of runway for all new investments, and one company I spoke with even raised a Series A to last them three years! Uncertain times demand enough cash to weather this and future storms.
This turns the tables on many startup CEOs who were used to high levels of spending driving their marketing, customer acquisition, development or product releases. Such high-spending management teams often relied on large workforces to drive growth, forcing them to make layoffs when the pandemic hit. In turn, that pushed the management teams themselves back into the organizational workforce as doers, not just leaders–an unfamiliar role for many. Conversely, the traditionally frugal CEOs, who were slow to hire and who relied on a small group of highly talented team members, had such low pre-pandemic spending that they did not need to make layoffs, nor did they experience significant drops in productivity; for them, the work was business as usual. While high-growth management teams are now forced to adjust to a new normal, these more deliberate management teams are well positioned to keep their spending down, extend their runway, and continue to drive productivity through their businesses.
Beyond simple budgeting, we are seeing two business models with particular resiliency and capacity for growth in this new world: those that are likely to see sustained or increased customer demand due to the pandemic, and those that fulfill emergent pandemic-related customer needs.
Sustained or Increased Customer Demand Model
The first group consists of those businesses whose industries have been largely untouched by the pandemic. It may be hard to believe that any industry is not somehow negatively impacted by this virus, but for some it has provided a boon in the form of increased discretionary spending from their client bases. Home improvement is probably the most recognizable sector seeing such gains. This year, many homeowners have spent less on luxuries like vacations, entertainment and fashion; simultaneously, they have spent months working from home, staring at peeling paint, drafty windows and cracked tiles. This has kept the residential contracting industry relatively strong, while also benefiting the multitude of tech companies competing within the $500B home improvement industry.
It is important to note, however, that these “by-product” growth industries generally cater to customers with disposable incomes, and their gains are not well dispersed across socio-economic brackets. Not only has the non-professional workforce suffered greater job losses this year, but a disproportionate number of the brick and mortar businesses that serve these customers have closed–163,000 since March 1, according to Yelp data, consisting largely of restaurants, apparel retailers and other small businesses. Amazon alone can’t make up for all of those lost sales, leaving an opportunity space to be filled by resilient and innovative businesses.
Emergent Pandemic-Related Business Model
The other resilient businesses doing well in the current environment are those that have pivoted or expanded to address pandemic-specific needs–the most notable are virtual collaboration platforms like Miro and Zoom, or food delivery platforms such as DoorDash and UberEats. But while the pandemic has produced ideal growth conditions for such companies, the same conditions will provide opportunities for their competitors to address changing customer demands in more nuanced ways than these incumbents. For example, at frog we are working with a new workplace productivity company that is specifically focusing on the remote collaboration needs of designers and engineers, as well as another company focused on addressing the inefficiencies and inequities of tipping and profit-sharing in the restaurant delivery industry. These unfair business practices that cost the restaurant industry billions of dollars were often overlooked pre-pandemic, but they are now likely to drive a whole new set of self-aware restaurants and consumers looking for a better way. Both of these companies are likely to gain traction in markets that otherwise might never have materialized prior to Covid-19.
The coronavirus pandemic has already reshaped the world in countless ways, creating tremendous new challenges, but also new opportunities. Because developed economies have become increasingly reliant on the startup-dominated tech sector, their economic recovery will depend disproportionately on the ability of nimble and resilient ventures to innovate and scale solutions to our most pressing economic and public health problems. That means forward-looking and resilient venture design is more important now than ever, both for society as a whole and for individual firms and entrepreneurs.