Tech startups are switching strategies as they try to weather the coronavirus storm
It's hard enough for any entrepreneur to convincingly pitch their idea in front of a board of investors, but that becomes much harder when you can't leave the house. Add in the ripple effects of a global pandemic on the world's strongest economies, and it's easy to see why startup founders are bracing themselves for a turbulent few months.
As the COVID-19 coronavirus continues to cause turmoil, and with new analysis emerging every day to predict huge falls in global growth, VC funds are already tightening their belts, reassessing investments and identifying priorities. For pre-revenue, early-stage tech companies, all the way to more established startups waiting on their next round of funding, the disruptions caused by the virus don't bode well.
CXO
"I don't want to sugar-coat anything," Russ Shaw, the founder of the independent network Tech London Advocates, told ZDNet. "This is turning everything on its head completely. Entrepreneurs are feeling nervous and frightened. The name of the game for many of those businesses has become 'survival'".
A survey published by Shaw's Tech London Advocates as the UK entered lockdown, in fact, showed that half of tech businesses in London would be prioritizing staying in business in the next three months, and roughly the same amount anticipated that COVID-19 would threaten the viability of their business or employer.
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While all companies, large and small, are set to experience some level of disturbance due to the pandemic, for the businesses that are still in their infancy, the effects of COVID-19 are likely to be further magnified. As cash flow issues arise, the projects that rely on funding to get through the next quarter are already struggling.
The trouble stretches from the earliest stage of innovation – like in university labs, where much of the tech sector's intellectual property is produced, and from where many a successful spin-out has originated.
With universities around the world suspending access to minimize social interaction, scientists are increasingly worrying that they won't be able to access research grants, or fulfil the commitments of grants they have already received. Tim Bradshaw, CEO of the Russell Group, which represents 24 universities in the UK, recently wrote an open letter to the research and innovation agency UKRI asking for an "emergency fund" to be launched to cover the salaries of staff and research costs.
UKRI's deputy director of investment strategy David Rogers then said at a conference that protecting the country's research and innovation system will prove to be challenging. "It may not be possible for some science and innovation research projects to continue, while we have to preserve the essential ones," he said. "Universities and institutions themselves have to make decisions on what activities they should be pausing. But we are continuing UKRI's program of business grants, to continue research calls where appropriate."
The research and innovation agency has committed to provide extensions to grants, and to operate funding systems as normal, to the extent that it is possible; and the organization is in talks with the government's department for business to understand the full extent of the issues. It has already warned, however, that "there will clearly be major impacts of the coronavirus pandemic on all existing awards from UKRI."
The knock-on effect of the government retreating from funding certain projects is likely to be seen at the level of VC funding, Zoe Chambers, early-stage investor specializing in deep tech at VC firm Octopus Ventures, explained to ZDNet. While at the moment, she said, "this is all guesswork", it will probably be the case that investors follow the priorities set by the government.
"If the government only agrees grants for certain research areas, then we will only see startups coming up within those areas, where they can get access to funding, to then commercialize their technology," said Chambers. "The natural immediate reaction would be to invest there, and retrench from the fields where the government isn't investing."
For those whose projects have been gathering momentum, and who will suddenly see their plans come to a stop, there is reason to feel dispirited. Many venture capital firms, over the past few weeks, have been sharing advice with both investors and portfolio companies to prepare for the months ahead. At the beginning of March, for instance, Sequoia Capital sent a letter to founders and CEOs stating that "coronavirus is a black swan" and stressing the need to have "a prepared mindset" for the potential upcoming scenarios.
Among the companies that have already made it out of the research lab, of course, the impact caused by COVID-19 will vary. Talking through the spectrum of possibilities, Chambers maintained that there is definitely a "best place" to be in. The later-stage companies that are already profitable, and can manage their own balance sheets, are predictably those better prepared to face the crisis.
Then, continued Chambers, you have businesses that are still mostly VC-backed but have some cash sitting in the bank that they can make last for as long as possible. For companies with a shorter runway – say, less than 12 months – things will start to get tricky. "You're going to have to prove your ability to scale," said Chambers. "You may be able to find funding, but potentially from other sources of capital".
Innovation
And then there are those who were already struggling. "If your business was going sideways anyway," said Chambers, "it could be a good time to say you're not going to take the project forward."
One piece of advice that is valid for every entrepreneur, however, is to keep a strong hold on whatever money is already there. "Basically, cash is king," said Chambers. "Whatever stage you are at, the right way forward is to try and put as much of it in your control as possible."
SEE: Coronavirus: Business and technology in a pandemic
Pretty much the exact same tip was put forward by Russ Shaw, who echoed Chambers in saying that, as investors defer or pause investments until they get a better grip of the situation, the main challenge for most businesses will be around cash preservation. "Save as much cash as you possibly can," said Shaw – meaning, stop unnecessary expenditures, understand cash flow requirements for the next few months, and run the ship tightly.
Some results of the survey carried out by Tech London Advocates fall in line with that: the report found that 63% of respondents thought that cash flows would be their businesses' greatest challenge for the near future. And many are counting on the government to ease the pressure, with 40% saying they hoped for deferred payments and tax relief, while a quarter of respondents were rooting for loans.
The UK government's response, so far, has been received with mixed feelings. The chancellor initially announced a £330 billion ($404 billion) package to help firms manage cash flows; to date, £90 million ($110 million) of business-interruption loans have been approved for nearly 1,000 firms.
Unfortunately, many startups and scale-ups can't access such funding, because they are not yet viable businesses. More than half of the organizations surveyed by the UK's leading lobby group for technology companies TechUK, in fact, reported that they would be ineligible for support from the government.
In other words, the cash needs of pre-revenue, early-stage tech companies are yet to be met. Gerard Grech, the chief executive of technology network Tech Nation, commented that the government's scheme "does not appear to address a key issue we have been hearing from early-stage businesses working on ground-breaking solutions." Although a cash injection would be a welcome push for startups struggling with declining sources of funding, it would seem that the current measures in place are insufficient.
A similar concern is emerging in the US, where the Trump administration signed a gargantuan $2 trillion (£1.7 trillion) rescue package for businesses. In a recent letter to secretary of the treasury Stephen Mnuchin, however, the speaker of the house Nancy Pelosi remarked that VC-backed startups would be unable to apply for loans under the terms of the deal.
But it's not all doom and gloom. As Shaw pointed out, the government is moving fast to adjust the response to urgent needs; the Tech London Advocate CEO remains confident that the chancellor will "mobilize quickly" to try and address the issues at stake. Case in point: under a new scheme, self-employed workers in the UK can now apply for taxable grants worth 80% of their trading profits.
With self-employed workers being a key part of the tech startup ecosystem, the support scheme seems a helpful solution for worried entrepreneurs. Some private sector initiatives have also cropped up to give relief to earlier-stage startups; for instance, NatWest has teamed up with the Prince's Trust charity to launch a £5 million ($6.1 million) fund for young entrepreneurs across the UK to keep their projects afloat. Eligible recipients include 18-30 year-olds who are in the process of starting a business and don't have any other source of income.
Tech London Advocates, for its part, launched a COVID-19 resource hub, with tools, help and advice designed for its 10,000-strong community, "to help the ecosystem get through this tricky period", said Shaw.
The network's founder noted that although the challenge is immense, the community is also well-equipped to confront instability. "I'm worried about entrepreneurs, but I know they are also some of the most resilient individuals I've come across in my career," said Shaw. Founding a startup rarely goes hand in hand with absolute certainty of the future and guaranteed safety nets; and if there is one thing that early-stage businesess are familiar with and good at managing, it is unpredictability.
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For Zoe Chambers, there is no reason that someone with a great idea should stop pushing their project forward, but she instructed entrepreneurs to do so with a little more caution:"'The world is my oyster' doesn't work as well as before," she said – the advice is not a radical U-turn from the normal attitude she encourages. "Operate in a lean manner and only do what you need to do," said Chambers. "That's everything we try to make entrepreneurs aware of in normal times anyway."
With a community that, by nature, is already prepared to be scrappy and creative, Chambers is confident that the crisis will see some unexpected projects flourish. After all, she noted, a few "mega companies" came out of the financial crisis in 2008. UK-based unicorn Revolut, which is now valued at $5.5 billion, even claims that the global financial crisis is what gave birth to the fintech industry. The company's CEO Nik Storonsky, who was a trader at Lehman Brothers when the bank filed for bankruptcy in September 2008, says that an entire generation of entrepreneurs "rose from the ashes" of the financial system.
From the mobility space, as populations remain stuck in lockdown, to AI, with more data flooding in every day, through the evident boom of med-tech: according to Shaw, disruption and innovation will come from the Covid-19 crisis in a big way. "I haven't met an entrepreneur in my career who doesn't look at a challenge or a crisis as an opportunity," he said.
Tech companies big and small are already helping governments around the world tackle the pandemic with chatbots, supercomputers, hackathons, and more. As they look to the next years, therefore, startups and scale-ups have a chance to build their business models as a solution for an uncertain future.