It’s a rough situation for everyone right now amid the global pandemic: businesses are closing, the gross domestic product of countries is falling, people are getting laid off, and paranoia is spreading all around. But, more specifically, what does this mean for startups? What will the outcome be for businesses that have just recently begun to blossom, only to be hit with this storm? In order to help as much as possible, we’ve compiled some of the three most important questions that CEOs of startups should consider in light of this pandemic.
1. What to do if the recession lasts 18+ months?
In our Spotlight Show on YouTube, we talk to Keith Ippel, a prominent impact investor who shares his insights into the current situation of the recession and what kind of shadow it casts upon smaller businesses and startups. One of the key things that he mentioned was that it was optimistic to assume it would take 18 to 24 months for our economy to truly recover or at least gain some semblance of what it used to be.
Let’s first try to be optimistic: consumers will start to gain more confidence in their speeding and the economy will go back to the way it was in about 18 months — the amount of time that the Great Recession of the late 2000’s lasted. In this case, the best approach is to attempt to reduce costs — be it variable or even fixed. Cutting variable costs can mean laying off some employees temporarily or even cutting back on production to cut the cost of raw materials. In Figure 2 below, it’s shown that about 87% of businesses will first attempt to reduce any workers they have on overtime or lay off employees. As for fixed costs, even though it’s not as clear and may be more of a hassle, some simple ways include finding ways to renegotiate rent to another facility or lease the equipment used in production.
Okay, now for the more pessimistic outlook. What if things don’t go back to normal in 24 months and it takes more than this? This will bring us to our second question: should startups change their business model to ensure the survival of their business?
2. How should I change my business model?
Given the constantly evolving situation of the world, it should be clear that our business model should evolve too, as to stay stagnant is to fall behind in this economy. For example, FlyBe, a UK regional carrier, recently filed for bankruptcy, as they were a smaller privately-owned business that made revenue solely from travel, and we all know the heavy restrictions and reluctance to do that nowadays. For most startup CEOs, it is crucial that they adopt an abundance mindset that prepares them to face the hardships of the next day. However, while it is important to be optimistic, it is equally important to investigate how one’s customers and revenues have changed. If startups sell their goods or services to other businesses and are therefore in a B2B market, have any customers closed their operations? How has this affected their revenue? These answers will maybe prompt them to rethink their partnerships. Likewise, if a startup is in a B2C market by selling goods and services directly to individual consumers, have their sales declined? What kind of reaction do they have from their consumers about the goods or services that they’re providing? Once CEOs have figured this out, the next best step would be taking this data and accommodating it into their startup’s metrics to get a better idea of exactly what damage (or benefit) the virus has done. An example of a successful shift in platform for a B2C company is Green Vanity, a luxury cosmetics retailer that prides itself on being responsibly sourced. When Nikki Hunter, owner of this business, realized that she was operating at a loss to keep her shop open, she eventually switched to exclusively an online platform. She was able to make the most out of her situation and successfully adopted a solution that allowed her to thrive — something a lot better than barely surviving.
3. What are the courses of action for my potential investors?
Smaller businesses and startups are often hit hard by recessions such as these, as they’re not qualified for emergency relief funds and struggle to make revenue and the transition to virtual platforms may not be available. However, venture capitalists and angel investors find themselves in a similar predicament: what should I do? In most episodes on our Spotlight Show, we get a better idea of what venture capitalists are going through by having a comprehensive interview with them. Two of the biggest factors they are concerned with these days are liquidity and impact. Some startups are now focusing on ways to combat the coronavirus, whether it be about bulk area sanitization technology or improving the quality of standard technologies such as oxygen supply machines. But, on a smaller scale, most smaller businesses will attempt to help the situation in any way they can. Let’s take the example of The Table Café in Kelowna, B.C. When the virus started to take its toll in March, the restaurant’s revenue decreased by about 40% — a considerable amount in the restaurant industry. However, Ross Derrick, the owner of this place, managed to come up with an idea to give back to his community as well; he ran a campaign that would charge customers about $18 to purchase a meal for not only themselves but also for a health worker on the front lines. Now, this didn’t exactly help with the revenue stream, but this generous act gained publicity and eventually, more and more people showed up to support this business.
After startups have asked themselves these questions and gotten a good idea of their next steps moving forward, the next thing to do would be to find ways to implement them into their business operations. The sooner startups can get started on this, the better they can prepare for the recession — whether it lasts 18 months or 3 years, CEOs and their businesses will be ready for it all.
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VenturX is a web platform that helps entrepreneurs through their journey from idea to launch and beyond. VenturX uses data-driven analytics to score and connect startups and investors at Seed and Series A financing.