The Covid-19 is not only a health crisis but as such represents an imminent restructuring of the global economic order. Several economists and researchers are foreseeing one of the worst economic crises of all times. In this short piece, I reflect on various challenges for start-ups and how they can prepare for the upcoming months.
First of all, I would like to clearly state that all predictions are only predictions. Many of the projections lack any added value and cause more harm and chaos. There is very limited information at this moment as to when and how we will see the end of this. The current crisis is caused, as Isabel Schnabel, a Member of the Executive Board of the ECB clearly stipulated by the lack of supply and demand at the same time, which will cause a massive shock for the markets. Challenging our liquidity. Yet, as we know from global economic history, economic downturns and recessions are part of our economies, for which we have macro- and micro-economic tools and procedures. Private and public institutions are to some extent equipped and those that are not will suffer the most. However, the lack of supply and demand will naturally affect everyone, including the start-ups, unless they are in biotechnology and provide services or goods for hospitals and clinics in regard to Covid-19 or offer on-line educational or cultural services. These might be actually in a good position. But what about the rest?
Let’s start with the challenges.
The upcoming financial crisis, that is behind the doors, which we will open once we can leave our apartments, will bring the biggest challenge for the start-ups: funding shortage. If we look back to 2003 and 2004, in the aftermath of SARS, the funding for start-ups declined by 27% and 29% respectively in Asian markets. However, by the third quarter of 2004, the funding started to gain momentum. In 2016, after Zika virus, the funding in South America dropped by 50%, but by 2017 the numbers were back. One could see some parallels here. However, please recognize that Covid-19 is not a local emergency, but a global one – affecting all economies, causing major liquidity issues across all markets, including innovation and technology. However, funding for bio tech will be surely available.
Thus, what shall start-ups do? If start-ups can lock down the funding offers, do it as soon as possible. Otherwise, consider governmental support that will be coming in many economies which will support small and medium size enterprises (SMEs). Reflect on how your governments define SMEs, what are usually the requirements and whether you fulfil them or at least can fulfill them in an honest manner in a foreseeable future. Hopefully, we will see some governments recognizing the economic potential of start-ups when designing their financial packages. On the other hand, due to abundance of insolvencies and restructurings, you might be able to catch a true human capital, which is often more valuable than the monetary. One major and obviously straight-forward advise – tighten your belts – Now!
Turning to the positives and why many start-ups might survive all of this?
The lack of funding is often the modus operandi. Start-ups for months, often years conduct their business in a month-to-month mode, where very little is foreseeable and even less certain. At the same time, many start-ups working set-ups allow home office and given the limited liquidity, they also limit unnecessary expenses. This will support the survival rate of start-ups that are preparing for dry season for several months, possibly couple of years. Resilience is the number one factor that will determine which companies and start-ups survive and which will not.
Another point of hope for start-ups is the recognition that the next normal will be unprecedented. We will witness a dramatic restructuring of the economic and social order, in which business and society have traditionally operated. I assume that once the curve of Covid-19 starts to flatten, we will initiate discussions on the contours of new market structures and business models. We will possibly enter these discussions with a huge debt crisis, but nonetheless, we will recognize the need to redesign the world that we are living in. Some hope that the governmental help and bailouts will be accompanied with green clauses and the vision of fighting the climate change. These months have shown undoubtedly that it is us and our activities who are causing all the harm. The Social Media meme of ‘the Earth is sending us all to our rooms to think about what we’ve done’ is indeed accurate…
Those start-ups who are able to pivot and adjust their solutions to these changes will become successful. The re-imagination of the new and green world (hopefully) will be essential. The crisis will reveal opportunities to improve the performance of businesses and I believe we will also see substantial change in the supply-chain models, re-evaluating the local networks and bringing the production closer.
I will be following the situation and will try to support all of you who are in my network as much as I can. For those of you who are interested in navigating your start-ups, our book Start-up Law, Alexandra Andhov (ed) with Edward Elgar 2020 is coming out soon and will be accessible online for free without any restrictions.