The crisis will fundamentally change the economy. Your business needs to change with it.
The COVID-19 crisis has turned our world upside down in a very short amount of time. Many of us are in survival mode as governments and cities fight to mitigate the disease. We’re also well aware that this is only the beginning. The economic disruption caused by this health crisis could linger as long as the virus itself.
In this economy, many companies are trying to figure out when life will be back to normal. But that may not happen. Staying afloat in the time of coronavirus will require innovative thinking and developing a “new normal.”
To get a picture of what businesses can do to prepare, I reached out to experienced investors, including Shaun Abrahamson, Managing Partner at UrbanUs, Andrew Ackerman, Managing Director at Dreamit, and Ahu Serter, Founder & President of F Plus Ventures and smart-mobility-focused Farklabs Innovation Center. I’ve developed these 5 questions every startup founder and leadership team should answer for themselves immediately to take decisive action.
Asking the right questions and giving honest answers will be your compass to coming out of this crisis intact and even on top.
1. What is possible for my business in this crisis?
First and foremost, you’ll need to define what “new normal” means to your business.
During our phone conversation, Andrew Ackerman suggested that startups should think about the long term: “In the long run, whatever new normal turns out to be, is that better, worse or the same for my startup?”
Shaun Abrahamson explained one challenge that startups should be considering. “Teams need to plan for much more difficult fundraising environments, meaning they will likely raise half [the funds] and the process might take two times [the effort], so they need to adjust, even if it comes at the expense of growth plans they had at the start of the year.”
Now is the time to revisit your purpose. Rethink your mission statement. Redesign your products and your client profile. Ask questions like: Why do we exist? Who do we exist to serve?
Taking a realistic look at what is possible for your business, you may realize that you cannot meet your original goals. Accepting what isn’t possible is an important part of building resiliency and creating goals that fit the new normal.
2. How will my business survive in the long run?
Focusing on growth is normal for startups during a healthy economy, but during a serious economic crisis, growth might have to be put on hold. In these conditions, you will have to focus on what you need to do to survive.
Shaun Abrahamson: “We have set a goal for each company to have at least 12 months of runway. Mostly this means 25% – 50% reduction in burn, often via significant pay cuts across the team. In some cases, layoffs. We expect 80% of the portfolio to achieve this goal in the next few weeks. Beyond buying more time, these plans help founders shift their mindset from growth to survival.”
Andrew Ackerman supported this assessment: “Your long-run plan won’t succeed if you only have cash for three months. You’ll need to take steps immediately to guarantee your business is going to make it. In most cases, that means cutting your burn.”
He added, “One of our startups does coworking space on demand. They don’t have any assets, it is all unused space in restaurants and hotels... They are making zero revenue, all the memberships are on hold. They cut very aggressively, over $150k per month, at their burn. They let 10 people go.”
When you cut your burn, you are likely to see your revenue go down. Sometimes there is a human cost. This is never easy, but when you develop a survival mindset, you will be able to understand when it’s necessary.
3. How can I make lemonade from lemons? That is, how can I pivot?
The simplest answer is: you must reinvent your superpower. To survive and reach for opportunities in the current economy, a successful pivot might be the key.
Ahu Serter recommends businesses pay attention to customers’ changing needs instead of focusing on sales efforts. “Your solution no longer represents the same value to them as before,” she wrote. To successfully pivot, find new ways to offer value to customers.
Andrew Ackerman noted there are already a few startups that deal with COVID. “Our portfolio company Biomeme develops a device that turns any iPhone into a mobile DNA lab to accurately perform tests to identify things like microbes, infectious contaminants, foodborne pathogens and genetic mutations. They shifted business operations to supporting SARS-CoV-2 [the virus that causes COVID-19] testing efforts, and to take the necessary time to scale manufacturing to meet the demand, they suspended their online store. They can make product fast enough.”
Shaun Abrahamson cautions that the ability to pivot during the crisis “depends a lot on the specific businesses. Some…are well positioned to serve new problems. But most of our portfolio is seeing neutral impact. This means they're roughly going to track overall GDP in coming quarters, and some will find new opportunities to serve customers, but not necessarily new ways to generate revenue.”
He points to their portfolio company Miles, which offers rewards based on how people move around. They have tracked a rapid fall in all forms of mobility. “Miles quickly pivoted to offer rewards for staying home, and they have been setting growth records.”
The companies that will come out of this economy stronger than ever are the ones that will be able to adapt to the new normal and pivot successfully, whether towards growth or simply survival.
4. How can I make sure our pivot presents opportunities for growth?
This is a tough question to answer. If you’re in survival mode, growth might have to wait. But crisis-specific solutions could offer room for maneuvering.
Shaun Abrahamson answers: “I'm not sure you can, but if you are focused on serving customer needs, you are halfway there. It may be that people are only spending on the most critical things—this is good for urban tech. Most of the services continue to operate because they are essential. If you help provide better services, there should be room to grow.”
Ahu Serter believes the ability to pivot quickly and cheaply will differentiate winners from losers.
According to her, testing fast enough is most important. You know the customer’s acquisition cost and the type of customers that are interested in your product. What questions do they have that you can get from onboarding forms? Getting that information ahead of time will support a successful pivot.
The best opportunities for growth during a crisis might come from focusing on consumer needs, then testing new products quickly and efficiently.
5. How can my business raise funds during a crisis?
According to the investors I spoke with, there will be a fierce competition to secure funding during a crisis, but the unique environment presents opportunities as well.
Shaun Abrahamson: “Over the last few weeks, we’ve worked to help startup founders understand our after COVID-19 world. It’s likely that seed-stage fundraising will be especially hard, as it was in 2008 and after 9/11.”
Why? Shaun notes three reasons: one, that VCs will be spending a lot more time on their current portfolios; two, many VCs are simply waiting to gather information about the post-COVID world; and finally, most VCs have never completed a diligence process without meeting the team in person.
Andrew Ackerman forecasts that there will be less capital, but also less competition. He sees this as a temporary setback. “In this environment, new investors…[may be] in the process of working through the impact. We will be through that process relatively quickly, maybe in a couple weeks, maybe a month or two, and then we should be investing again. We have the money, absent a really, really big depression where our investors default on their obligation to us. We have to deploy it within the same amount of time we used to. So the terms are going to be good and our bar is going to be higher. '
“Strategic investments from real estate operators are gone. They are not getting rent. Corporate Venture arms that are doing a lot of balanced investments, those are done. The angels that were getting into early-stage startups that were not really professional are adjusting their portfolios; they will not be writing checks anytime soon. With less capital, generally speaking, outside VCs going into startups will be pickier. Some weaker [startups] won’t get money. That is actually better for the companies who get the money since there is less competition.”
Pivoting to Survive
In these unprecedented circumstances, there is no blueprint for success. Those who can make their own maps and adapt to the new normal will be the most resilient. They will be able to build a survival mindset that enables a pivot towards growth.
As a cautious optimist, I still believe there is a light at the end of the tunnel—but only if we are able to adapt to our new normal faster than ever before.
Pivot if you want to be remembered. Dare to change and remember Rumi’s saying: “Try not to resist the changes that come your way. Instead, let life live through you. And do not worry that your life is turning upside down. How do you know that the side you are used to is better than the one to come?”
Arzu Tekir is the Founder and CEO of Urbanite Venture, a growth consulting firm helping urban tech companies transform cities. To companies solving urban problems, Urbanite Venture is the independent advisor and business partner that brings new market opportunities, better relations with the city administrations, effective business development plan and capital.