How Coronavirus will Impact Startups and What Could be the Survival Strategy?
Founder at Graffersid.com | Developing Tech products for startups with billion dollar dream
Originated in China, Coronavirus has affected more than 380,000 people worldwide. The number of people testing positive for COVID-19 is increasing at an exponential rate. Stocks have plunged again on Wall Street and the spread of the pandemic has left the business over the world counting costs.
Big shifts have been experienced in stock markets
, where the share of the companies are bought and sold. And, the outbreak of Corona Virus has made many small business and startups to think about Plan B.
All over the world, the Governments are requesting people to practice social distancing, which posed an immediate impact on industries that cluster people such as conferences, trade shows, hospitality industry, movies, sporting events, restaurants, schools, airlines/cruises and ships of all types.
Whether it is big names like Amazon, Google and Twitter or medium-scale organization, every company is offering work from home facilities to its employees. Large retail chains have even consider shutting the stores to curb the spread of disease.
The impact on the small business and gig economy has not been brought into the light yet, but for sure gig and contract-based workers are the ones who will be severely impacted by locked down.
Moreover, workers associated with the gig economy often are the ones who have fewer cash reserves to manage sudden downturns. The ripple and feedback effect of these closures will be the loss in the job of thousands of employees worldwide, which will further pull down the economy as these employees will have short of funds to buy products and services.
If you are running a small scale industry or startup business, your first priority (after your family) is how to keep your customers and employees safe. The questions that every small business and startup CEO need to focus on are:
- What does my business model look like?
- What will be the burn rate and runaway of your business?
- How long the problem will persist: three-month, one-year or three-year?
- What will my investors do?
Let’s start with the detailed insight on all the above-mentioned points:
What could be your new business model?
The world today is no longer the same as it was a month ago, and the situations are likely to become even worse 4-5 months from now. If you think that your prepared business model can still remain the same, then you are possibly running out of business.
In the current state of the virus spreading in all the countries augmenting at a greater pace, it becomes necessary to quickly perform a retest on the assumptions you made about customers and revenue. If your target audience is the B2B market, then monitor whether your customers sales has dropped? Are you customers have shut down for the next few weeks or laying off employees? If your target is the audience is B2C market, then assumptions you made about payers are still correct?
Also, determine what could be your new financial metrics? Get receivables on the top and find out the cash you are left with.
What will be the burn rate and runway of your business?
To determine the burn rate and runway of your business, it is critical to determine the fixed and variable expenses. Rent comes under fixed expenses, while salaries, travel, consultants, commission, and other supplies come under variable expenses.
Next, take a look at the actual revenue that your business is able to generate every month. If you are an early-stage startup company, then this number should be zero.
Now how would you calculate your net burn rate? Subtract the monthly gross rate from monthly revenue to get your net burn rate. If you have more money than you are spending, then you have a positive cash flow. On the other hand, if you are a startup and make less revenue than your expenses, then your net burn rate would be negative.
Now, what is the runway? Runway in terms of business can be defined as the amount of money that your company has before it runs out of money.
Unfortunately, with the Coronavirus outbreak in the world, it is no longer a normal market. All the assumptions that you made last month about consumers, revenue, burn rate, runway and sales cycle have already crashed.
Moreover, if you are a startup business, then you must have likely calculated the runway to last until the next round of funding. Assuming that there is going to be the next round has become skeptical for now.
How long the problem will persist: three-month, one-year or three-year problem?
The next thing that should be estimated is how long the problem will last. Will the shutdown of businesses remain limited to a temporary blip in the economy or will this drive US and European countries into a recession for years?
If it’s just three months from today, which is highly unlikely, then an immediate freeze on variable spending (i.e. expenses of travel, marketing and hire, etc.) is in order. But, if the effects are going to be resonating, then you need to start to reconfigure your business. Startups in the market now need a lifeboat strategy to figure out how much minimum your company needs to hold in order to stay alive.
A one-year of stretch in the deadly outbreak can make you:
- to cut down your burn rate i.e. layoffs and elimination of perks to reduce variable expenses.
- renegotiating fixed expenses like rent and lease payments etc.
- and lastly, putting all the essential elements for survival in the lifeboat.
If you were selling online then you still have an advantage, assuming that customers are still there on the web. However, if you are planning to hit in-person, then you need to rework on your strategies.
Now, the question is does this open new value and kill the before-thought proposition?
The answer to this question depends on how long the pandemic last? Would it be for three years?
What if the problem will last more than a year or so? Then, you might need to change your business model completely and jettison everything to prevent the cease of plan. Also, to make sure that your business plans align with the current situation, plan your business model around the new rules of social isolation. Can your product be produced, sold and delivered online? And, if not then can your product be positioned as a lifeboat for others to ride out of the downturn?
Being an entrepreneur, you need to plan, communicate and act with compassion.
What all can be done to prepare your product for a long stretch?
Revise your sales revenue goals, redefine product timelines, create an operating plan for your new business model and communicate it clearly to your employees and investors. The most important thing to remember in this whole scenario is –you need to act now. The biggest mistake some CEOs make is not implementing cost-cutting quickly enough. Most of the business owners dripped out layoffs and cuts, holding onto their dream project with thinking that the phase will pass.
However, this should not be the case presently. It has become important to come up with an alternative now.
What about your investors?
The fundamental element of survival is access to capital. In the present situation, your investors might also be worried are looking for ideas that can save their business in a locked-down crisis. The cold hard truth is in this state where all business operations are shut down and people are locked inside their home, VCs are also running their own crisis management
Some investors have only lived a blooming market and have only seen the phase when the capital investment was plentiful. Investors with grey hair only know how they have coped during the time of recessions in 2000 and 2008.
It is important to understand that this time recession will come due to the conscious breakdown of most of the economy, leading to a bear market. Hence, this time the health of the ventures is dependent on what hedgebanks, private equity firms and large secondary market groups do. For startups in the short term, the valuations will get worse and there will only be fewer investors looking at your deal.
Startups should prepare for a long cold winter. However, there is no need to lose hope as no winter will last forever and this is the time when smart founders and VCs will be planting seeds for the next generation of startups. Research and try getting in touch with them.
Amid Corona times, it is important for startups to realize that they have to start taking action now. Act with compassion and prepare a new business model looking at the current scenario. There is a conscious shutdown of the economy for saving thousands of lives, which is likely to cause a recession.
The COVID-19 is sure to change the way we shop, work and travel at least for a year. Hence, it is crucial to place a lifeboat plan for one to three years. Also, recognize that in this situation your investors will act in their interests.
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