Pivot, not panic: How startups are coping with the coronavirus crisis
When the City of Austin announced last month, with just a few days of notice, that the internationally renowned music, film, tech and arts festival South By Southwest (SXSW) was canceled, Abigail Rose was one of the many entrepreneurs who started to worry about the potential side-effects that the COVID-19 pandemic would have on their business.
For Rose, the co-founder of media-technology company Blended Sense, which connects local businesses with creatives to produce digital assets, SXSW would have been a one-shot opportunity for the Austin-based startup to meet with investors and customers.
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By this point in mid-March concerns were mounting, but Rose and her team pressed on with running the business. After all, explained Rose, Blended Sense, after having opened a first round of funding back in November, was about to close on a major $100,000 investment; it was only a matter of completing paperwork, such as due diligence.
Despite growing uneasiness on the global scene as the COVID-19 pandemic started reaching an alarming scale, Rose and her colleagues were feeling hopeful and ambitious. And then, Austin recommended that workers switch to remote working, and all business as usual came to a halt. "It was the same week that we were closing in on the check," Rose told ZDNet. "By the time we met the interested parties five days later, things had changed so drastically that they told us they'd had to put a pause on it."
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Blended Sense is far from being an exception in the current climate. The health crisis unfolding worldwide as the COVID-19 virus tears through countries is causing a tragic and devastating loss of life, and also creating economic upheaval along the way. That economic impact is being felt most fiercely by very small businesses – early-stage startups that aren't necessarily profitable yet, and typically rely on equity investment to build their business models and scale up.
A recent survey among global investors showed that up to 75% of respondents anticipated investing less than planned throughout the one-to-two year period that they see the hit from COVID-19 lingering for. Private market data company PitchBook has already clarified that the effects of the economic slowdown brought by the virus "will absolutely be seen in venture capital (VC)". In other words, the deep pockets of VC funds are shrinking, and entrepreneurs looking forward to their next round of funding shouldn't get their hopes up too high.
Startups at different stages will feel the impact differently, noted Pitchbook, but for companies still in their early stages, the way forward is bootstrapping. 'Survival', it would seem, will become the watchword for many pre-revenue companies from now onward.
"Survival?" Abigail Rose repeated with a laugh. "That's absolutely it. We have definitely gone into survival mode." Blended Sense, she explained, has at least had a head start in the race against COVID-19: from the day the business was launched, now one year ago, the company has generated revenue thanks to the content kits for creative assets sold via the website.
Rose explained that between 40% and 45% of her customers have paused their subscriptions in the past month, compared to a growth rate of up to 50% month-by-month before the crisis hit. The priority is now to cut costs while staying as productive as possible. "The first thing was to look at the state of things and say: 'ok, we have this much revenue to run our day-to-day operations, so how do we adjust that?'" said Rose.
That was the first pivot – "and the most emotionally taxing one," she added. With her 12 employees, the company's founder and her team set up one-on-one meetings with workers to explain what was happening, and why hours might have to be cut in the next few months. "As the C-level team, the biggest challenge at the moment is to make sure on a daily basis, that our team is motivated to go forward without the certainty of how long this drastic pivot is going to last for," said Rose.
Rose's second move was to adjust Blended Sense's business model to the changes in demand amid the new circumstances. If there is one thing that local businesses could use right now, it is certainly a better way to engage with their audiences online; and Rose found that the company's existing product could easily be tailored to the needs of customers in this new vertical.
Instead of staying subscription-based, Blended Sense is now offering an a-la-carte model to make the price point more accessible for businesses, and the team has started hosting webinars for small businesses on how to use digital assets during the pandemic. "Plus, our team members are getting real satisfaction from knowing that they're helping other businesses get through this," said Rose.
While entrepreneurs are by nature adaptive and resourceful, it can be a tough process: in the new webinars now hosted by the company, one of the recurring concerns has to do with entrepreneurs second-guessing themselves. An economic downturn is prime time for business owners to doubt the viability of their idea, and to question whether they have what it takes to pull through.
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Melanie Aronson, the founder and CEO of self-described "friend finder" social app Panion, is optimistic that she, for one, is sitting on a business model that will keep investors interested, even throughout the crisis. Panion, which had already raised a pre-seed round last summer, is currently in the process of raising a bridge round before embarking on a seed round in a few months: at least that was the plan before COVID-19 hit.
"Cash is the main concern at the moment," she told ZDNet. "We've decided to completely cut our costs down to the bare bone minimum, and try to raise a seed round in a month or two, when investors, rather than focusing on their portfolios, start looking at new companies again."
Her focus, however, has been on switching Panion's model to one that is more sustainable, and will generate cash in the new context. "In the last week, we pivoted to be more relevant," said Aronson. With countries on lock-down, indeed, a "friend finder" app aiming to connect people looking for platonic relationships wasn't going to last long; so the company's CEO transformed what used to be a B2C platform into a B2B one.
The idea, explained Aronson, will be particularly appealing to large companies with multiple offices around the world, who could use her platform to host their community of employees. A new starter, for instance, would be able to instantly find colleagues with, say, similar interests or common hobbies. "It feels super-relevant now, as it gives people a tool to stay connected," said Aronson.
It would seem, then, that so far entrepreneurs have responded to the crisis with new ideas rather than writing up applications for new sources of funding. Government funding, in particular, is off the cards. Aronson, who is based in Sweden, said that the government was yet to put forward help for small businesses altogether. In the US, Blended Sense's Abigail Rose similarly admitted that she did not hang any hopes on getting funding from the government, and that the company would certainly not rely on the prospect of public money in determining the way forward.
The Trump administration did sign off a $2 trillion rescue package to help the economy cope with the pandemic; but shortly after the announcement, it became apparent the terms of the fund left out most VC-backed companies, who won't be able to benefit from the package.
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A similar issue has come forth in the UK, where the Chancellor made available an initial £330 million ($410 million) of guarantees for businesses, in addition to setting up various schemes to help enterprises, such as the coronavirus business interruption loan scheme (CBILS) and job retention scheme.
Since then, various representatives of the tech industry have called on the government to adjust the packages, which as they stand do not include pre-revenue businesses. With most startups still too young to be profitable, a large portion of entrepreneurs have effectively fallen through the cracks of public loans and guarantees.
A survey led by the UK's leading lobby group for technology companies techUK showed, in fact, that over half of respondents would be ineligible for support from the government. The organization stressed that current measures do not address the needs of VC-backed companies who are struggling, and that "more work needs to be done."
Crowdfunding platform Crowdcube even launched a "Save Our Startups" petition earlier this month, which urges the UK government to provide liquidity packages for startups at risk, as well as stimulate private investment into early-stage companies. Endorsed by high-profile signatories, including the co-founder of Zoopla Alex Chesterman and the co-founder of Lastminute.com Brent Hoberman, the petition calls for similar commitments to those of the French and German governments. While France has announced a €4 billion ($4.4 billion) fund to support its startups' cash flows, Germany has released €2 billion ($2.1 billion) to help young businesses survive.
The idea hasn't won everyone over. Richard Blakeley, the CEO of Capital Pilot, which uses data to match startup businesses with investors, said that a blanket hand-out of cash from the government to startups is neither practical nor politically acceptable. "A cross between JFK and Norman Tebbitt would instruct startups to get on with it themselves, using their apparent resourcefulness to find a solution that does not rely on state handouts," he said.
From pivoting their business models to cost-cutting every time that there is money to be saved, it seems that "getting on with it" is already the attitude of most entrepreneurs in the face of the crisis. Some even argue that as far as money is concerned, the COVID-19 pandemic hasn't brought about any challenge that an entrepreneur hasn't already tackled. "I'm a female founder, so I've never been able to get a lot of money anyways," noted Panion's founder Melanie Aronson. "I've become very good at using the money wisely, and at finding loopholes to save up cash. It's something I've always had to do."
Arielle McKenzie is the co-founder of Caresplit, a platform that lets parents liaise to watch each other's children, rather than pay for a baby-sitter every time. Caresplit was in beta version, ready to be rolled out to both consumers and to a few partner businesses – mostly gyms and co-working spaces – that would have offered the service to their employees and customers; and then COVID-19 hit. Within three weeks, all the businesses that McKenzie and her partner were talking to had shut, parents were working from home, and their children were starting classes online. "We were ready to hit 'go'," McKenzie told ZDNet, "so that was probably the worse timing we could have had in terms of rolling out our product".
With a few angel investors and the prospect – now a very uncertain one – of raising a seed round in six months, McKenzie had to radically rethink the strategy. Scrapping advertising and passing on a few key hires were the first steps to ensuring that Caresplit could financially stay afloat; but more than bootstrapping, McKenzie immediately started working on pivoting the platform's model to adapt to the new circumstances.
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With parents struggling to juggle a full-time remote job with the need to help tutor their home-schooled children, McKenzie decided to tweak the Caresplit platform to let parents coordinate the supervision of homework via video chat. "We launched last week – well, 'launch' is a loose term," she said. "Right now, we are just trying to get it out to parents and schools. And it's gone well, so far. Some teachers are already setting up groups within their classes."
She added: "If we can keep our eye on the future and get the right investors, we can build what a new childcare will look like for a workforce that will be completely different in six months," she added.
McKenzie's optimism is by no means an exception. Melanie Aronson, the founder of social app Panion, is equally "pretty excited" about the future; and now, it's only about getting that excitement through to investors. But the plan is there, Aronson said, and she is "not too worried".
In Austin, Texas, Blended Sense's co-founder Abigail Rose was also adamant that even losing a $100,000 check would not stop her team from pushing forward. "This has probably been the most interesting chapter in our year-long journey," she said. "We never expected a pandemic to hit us in the middle of our first year. But I do think we are positioned to come out stronger on the other side."