For many startups, COVID-19 will be a life-changing event. The upheaval caused by the virus will have a huge impact on the livelihoods of many. Never before, for the past three decades, have whole industries shut down and consumer demand dropped so far and so fast.
The economic implications remain uncertain. The world economy is already experiencing a sharp downturn. A quick v-shape recovery is unlikely to occur as countries prep themselves for the second wave of impact from COVID-19. Many economists have forecast a relatively slow recovery, as social distancing measures are kept in place for several months. It is likely the economy will shrink further in 2020 till 2021, and it would take until 2023 before economic activity returns to pre-crisis levels.
Priority cash conservation
For start-ups, the priority has never been clearer. The failures of unicorns like Theranos and 爱屋吉屋 (IWJW) have exposed flaws in their business models. The challenges of capital winter and now an economy that struggles to resume to normal, all point to the need for startups to change. A change from ‘burning cash’ towards cash conservation, right sizing and a change in their respective business model.
Startups, unlike other businesses, may not have generated revenue yet. Faced with a rapidly changing business environment, startup founders must rethink the initial assumptions that they previously had, which had led them to the establishment of their businesses.
Learn from the past
To anticipate the challenges ahead, startups can learn from the past recession, and the change in customer behaviour due to COVID-19 to formulate their new strategies.
Piecing these information together helps startups to reconsider the validity of their initial assumptions which were built upon pre-crisis variables. Many will have to hasten their restructuring, some will find a way to pivot and reinvent themselves as they seek to find their footing. Our conclusion is simple: stay nimble, and plan with a view of the emerging trends that are likely to emerge faster. For every economic crisis, new leaders and trends will develop and emerge to lead the economies to recovery and innovation breakthrough.
The similarities between dotcom and unicorns
Bubbles are never strictly identical. Yet, there are commonalities between the dotcom craze of the 1990s and today’s startups unicorns.
Twenty years ago, the Internet bubble peaked when the Nasdaq reached an all-time high in 2000. Globe.com, the social network of the day, which went IPO in 1998 and posted the highest one day gain of more than 600%. Its market cap was US$806 million but the company collapsed the very next year. Globe.com never made any money in the history of their operations.
Raising money and burning cash
From yesteryears dot-com startups like Webvan, eToys to the unicorns today, it is not unreasonable to draw parallels between the two. Customer acquisition costs form a huge part of their operating structure and companies like Amazon and Facebook eventually became profitable thanks to their large user base. Their path to break even relies on establishing market dominance.
In the case of IWJW，it emerged as a Chinese unicorn in less than 273 days. It burns through the funds it raised and lasted slightly more than 3 years before ultimately running out of cash.
Today, startups need to learn to bootstrap and be creative in growing their customer base and generating revenue. Capital winter has already arrived. Gone are the days where you can just raise funds because you have an idea.
Past recessions and recoveries tend to be consumer-led
Past experiences have shown that in previous recessions, recoveries tend to be consumer-led. As economic conditions worsen, consumers will cut back on spending. Already, we have seen announcements from companies on cost-cutting measures. It varies from companies like car rental Hertz to local retailer Robinsons, and fashion company Esprit. More are expected to come.
By contrast, recovery comes later for sectors producing mostly capital goods (including R&D, software development, databases and other forms of intellectual property). When a recession starts, many will still be completing customers orders for a while. As consumers’ demand for products and services declines, upstream activities will feel the impact. The uncertainty from economic slowdowns will see firms putting on hold their investments in new products and services.
For startups seeking venture capital funding, those that operate in less desirable sectors like Travel and Event Management, it won’t be a surprise to see that their requests being put on ice.
Changes in customer behaviour might outlast the crisis
The priority to save lives in the COVID-19 crisis has resulted in rapid changes imposed by the government on people’s behaviour. For startups that deal with the B2C market, there is a need to consider these impacts closely.
a.Increased adoption of online channels
Consumers are shifting to online channels. The lockdowns have shaped the way consumers buy things. Historically, e-commerce has been adopted for non-perishable items. With the structural change in retail, consumers are now looking to online channels for their groceries and other daily needs.
Consumers are expected to reduce their spending in practically all product categories. At the same time, a significant proportion of their entertainment and grocery purchases is expected to be shifted to online.
More businesses are now accommodating remote delivery of services. For example, in the past companies may spend more on travels. Today, they may opt to engage with their customers and distributed teams through video conferencing. Zoom, a leader in video communications, has seen their daily users surge 50% amounting to 300 million back in April. And for the first time, upcoming technology conferences which have traditionally attracted many visitors are expected to take place virtually. These include events like Apple WWDC, Salesforce Dreamforce, and many others.
With severe restrictions on movement, more professional services are expected to be delivered remotely without crossing borders. Given the savings in time and travel costs, it is unlikely that these sectors will revert to previous practices.
b. Social distancing is affecting sectors differently
With social distancing, will business operations change permanently? Or will companies return to their former ways of working when the crisis passes? Structurally, we will see firms finding stopgaps measures to manage remote teams as well as to ensure that employees have easy and secure data needed to do their jobs.
Some companies will take opportunities to improve work processes and stick to it.
As the COVID-19 situation improves, likely, priority will still be placed on ensuring employee and customer safety. These, in turn, will translate into long-term practices that may shape future work behaviour.
Secondly, there will also be cases where businesses can adapt readily. For example, companies like Google and Facebook have already announced that their employees can work from home till 2021. While others, like factories, will need to have in place safe physical distancing practices when they start operating again.
Given the challenges, industries like hospitality, construction, entertainment and retail industries will be heavily affected.
More significantly, unless there are large-scale testing and tracing in place, these sectors will be among the last to reopen. In turn, these sectors will face an impact on cash flow and profitability.
How can startups prepare for the next normal?
There are 4 themes that startups can consider when they engage businesses:
- Improve Operational Efficiency
Companies that have a limited structural change in their sectors will mostly take the opportunities to consolidate their customers and supply chains to improve operational efficiency. For example, food manufacturing, restaurants and other consumer goods companies will most likely look towards driving cost down and look towards improving operational efficiency.
- Transform for the better
There will be those that may see that the pandemic may have caused a permanent change in consumer behaviour. Businesses in this sector will most likely allocate capital and resources to support these changes. Already, we can see that significant investments are being poured into healthcare, financial services and education.
- Restructure to be more cost-effective
There will be sectors where the fundamentals will not change significantly. However, the demand will take time to be restored. Companies will undergo huge restructuring exercises to be more cost-effective while the promise of Industrial 4.0 may be a good time for businesses to rethink how their manufacturing processes can be optimised.
- Disrupt and lead
For every major shift in behaviour, new opportunities arise. The biggest hit sectors are most likely in the airlines, hotels and office-related services. With remote office work and the adoption of video conferencing likely to stay well into 2021 and beyond, what new business models can these sectors adopt? Will we see an accelerated effort in the smart city concept as cities reconfigure themselves for post-COVID? Will we see a ‘new travel experience’ via augmented reality?
The viability of start-ups’ business models will depend on the depth and length of the disruption in their sectors, and how effectively they plan. Given the uncertainty ahead, start-ups should move towards a model that allows them to operate in a large addressable market. Start local, but keep your view on the emerging global trends and develop a sustainable business model.