5 min read
COVID-19 impact on venture-backed startups
Rosie the riveter wearing a facemask

We’ve previously examined why the measures being taken to combat COVID-19 are right and necessary, but now we’re going to take a closer look at COVID-19’s impact on venture-backed startups.

Economic Devastation

📉 From travel to healthcare to supply chains and everything in between, the virus has been upending the economy as we knew it. At one point before the recent uptick, the market was down nearly 30%. We’re already seeing this cascading into private funding, which is down 16% compared to Q4 of last year and down 12% compared to Q1’19. Global deal volume could fall more than 20%. These are the biggest declines in the past decade. 

🦢 Sequoia-capital has already labeled this the Black Swan of 2020. In a note sent to founders and CEOs in their portfolio, Sequoia details the significant impacts this could have on business activity, supply chain disruption, travel ability, cash runway, fundraising softening, sales forecasts, marketing, headcount, and capital spending. They’re encouraging founders to make fast and decisive adjustments to the changing circumstances.

🇺🇳 The United Nations called the coronavirus pandemic the “most challenging” crisis the world has faced since World War Two because the deadly virus is “attacking societies at their core”.

⛈ Closer to home, I’m hearing VC say that this is worse than any global disaster in the last 20 years. From an economic perspective, it’s a larger meltdown than even the .com bust, 9/11, or the financial crisis. There’s a very high level of uncertainty and fear. Things could be pretty dark until Q4 and no-one is expecting a new normal until 2021. A steep valuation discount is coming, securing meetings will be challenging, and the bar for access to dry powder will be higher.

Some Silver Linings

But, but, but … So, we’ve established that things are bad. Really bad. But that doesn’t mean it’s time to take our toys and go home. Let’s look at some of the positives.

  • The Federal Government and the Central Bank are responding to this in a BIG way, and much faster than we’ve seen with prior downturns. Over $2 trillion in stimulus is on the way via the Coronavirus Aid, Relief, and Economic Security (CARES) Act, with additional phases widely expected. See our earlier post for details on the debt forgivable Payroll Protection Program (but note that things are still a little fuzzy for venture-backed startups regarding affiliate rules).
  • It’s a different time. This may be the worst economic crisis of our generation, but we’ve evolved. We have a tech economy of scale – cloud infrastructure didn’t exist in the .com collapse and it took millions to just get off the ground. We now live in Workforce 2.0 where folks can work distributed and have access to incredible communication tools. Our economy was strong going into this – economic statistics at the moment don’t reflect the normal economy.
  • History shows that the state of the economy is not a great predictor of tech startup success. Tech progresses independently of the market (and often drives it). It’s more about the founders – their ideas, vision for recognizing opportunity, and ability to adapt to fluid situations.
  • Lots of dry powder. VCs are open for business and anyone with liquidity is looking to invest now given the valuation discounts and disruption potential.
  • Big tech could emerge stronger in benefiting from changes in consumer habits. This will have a long tail for smaller tech and could provide a host of new opportunities.
  • Transactional companies should pop back up very quickly once social distancing subsides.
  • Amazing things will happen over the next 12 months with the gig economy, telemedicine, and people who need jobs inventing them.

☔️ Weathering the storm … New times call for new strategies.

Preparing for the Big Pivot

This won’t last forever and in parallel, a discussion is beginning about the pivot back to economic viability and eventual recovery.

NY Governor Andrew Cuomo concept on economic impact

What should you be doing now to weather the storm surge and begin preparing for the recovery?

  • 🛫 Increase runway. Do whatever you can to extend runway 6-12 months longer than planned.
  • 🕯 Be nimble. Build products to take advantage of opportunity. Pivots are happening all over for startups that have existing industry relationships and tangential offerings. Healthcare apps are adding messaging capabilities to communicate urgent messages with employees and patients. High-end restaurant reservation providers are quickly launching online ordering systems to allow high-end restaurants to do home delivery.
  • ✂️ Ruthlessly prioritize. Identify value inflection points and control the things you can control by focusing efforts. Defer some things to future rounds. Retain people who will be impossible to hire later. Survive.

🌊 Out of chaos and disruption comes opportunity. Playing fields are leveled. Resourceful entrepreneurs can be remarkable in stressful situations. Creativity thrives. Innovation is required. Don’t be pummeled by the wave – ride it!

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About the Author

Josh Sloat is the co-founder of Aurora Consulting. He lives and works remotely from Northern Michigan. Josh has been developing software and leading cross-disciplinary teams for the past two decades, with broad-ranging experience in mobile, web and desktop technologies. When he’s not solving first-world tech problems, he spends his time as a domestic engineer (loving father and husband), avid backcountry adventurer, and aspiring landscape photographer.