fbpx

The End of the World as We Know It: How COVID19 Will Impact Startups in 2020 and Beyond

Image by Pete Linforth from Pixabay

As of this writing, the novel coronavirus, now called COVID19, has killed nearly 4,300 globally, and the number of confirmed cases in the U.S. have quickly risen to more than 1,000 with some expecting both numbers to climb even higher.

Beyond the human toll of the virus, businesses across the world are feeling the pain. Three of the ten biggest economies (China, Italy, and South Korea) are entirely or partially shutdown. Other countries have put in place travel bans, and volatility in the financial markets are at the highest levels since then Global Financing Crisis in 2009.

While many in the U.S. had ignored the escalating crisis until recently, policy research firm RenMac.com has already noted the potential short- and long-term impact of the virus on the markets and the economy writ large.

For startups, the advent of the virus has been a mixed bag. Crunchbase has reported that UV Sanitizing Startups have seen a surge in new business, while conferences such as SXSW have been canceled. The situation has gotten so bad that even a conference on the coronavirus has been canceled. 

Many experienced investors are already starting to sound the alarm on the crisis in the making. A recently published memo by Sequoia Capital, one of the largest venture capital firms in Silicon Valley, has already called the present situation the “black swan of 2020.”

While economists might differ on whether the spread of the COVID19 virus a truly a black swan, the reality is that as recently as early-January, very few people saw this coming. The virus was mainly a localized event in the Hubei province of China over the New Year holiday. However, that has changed and today it is a global health emergency.

What does this mean those trying to get their startups off the ground? For starters, the world is changing quickly, and many of the things we took for granted even a few months ago have shifted – in some instances dramatically.

Beyond this, there are opportunities for those startups who already have an MVP, which can help those affected by the crisis. For those startups whose solutions have no natural solution to solving the crisis, the situation is different. 

In that case, they are probably best suited by rethinking their strategy for the coming months. This could mean delaying a product rollout, reducing headcount to control cash burn, or even redoubling their fundraising efforts. While the hyper volatility of the past few weeks is likely to make investors think twice about writing a check, the goal for founders is to make sure they are on the top of an investor’s list once the environment stabilizes.

Also, founders might want to look at their businesses and see how they can reduce risk to the virus itself. Best practices include cutting back on corporate travel, allowing team members the option of working from home, and reviewing contracts to identify potential issues before they happen.

Back to fundraising, some VC analysts are saying that Sequoia’s memo could signal the end of good times for early-stage financing. For funds, it could mean that raising capital for new funds may become more difficult – especially as Limited Partners (LPs) face issues meeting capital calls.

As mentioned, startup funding activity will likely take a brief pause, and at this point, the only question is for how long.  The reality is that no one knows for sure are the moment. In the best case, startup funding in the U.S. will start to return to “normal” by mid-May, while the worst-case scenario could see financing hit a standstill well into the summer.

Several VCs are already evaluating the cash burn of their portfolio companies. But this is only the first step as then the next decision will be to figure out which startups will need to give back their cash.

No doubting this will have consequences, and it is expected that many early-stage companies will have to shutter operations because of this. For those who are lucky to survive is undeniable that the crisis will impact the corporate culture for years to come. For those founders who don’t make the cut, there is always a chance to start over again. After all, startups are all about risk, and those who can learn from the lessons of the current crisis will emerge stronger.

Related Posts