In the wake of the Dow Jones dropping more than 1,800 points in one day and Sequoia Capital releasing a frank memo about the near future for investors and entrepreneurs, it’s worth considering how this current global health crisis is going to impact the world of startups as much as, if not more than, the world of large multinational corporations.
The news seems bad across the board. In addition to predictions of growing contractions for the global economy, major companies like JP Morgan, Apple, Nvidia, and more are all limiting or actively reducing their operations. Supply chains are similarly impacted, with even major suppliers of vital materials like chips from Qualcomm experiencing significant uncertainty.
Tight economic conditions like this pose a broad set of challenges for startups from the supply-side and the demand-side. On the supply-side, there has been an increasing reliance on offshore resources for everything from customer service to software development. These options are going to become less available and reliable. Funding to drive growth by hiring more staff, investing in marketing, or developing new products will be harder to come by. Even funding that was previously counted as a done deal may not be guaranteed, with reports that some investors are already warning startups they may not be able to meet their investment commitments over the next 6-12 months. Staff productivity will be heavily impacted, both in quality and quantity of work produced. There will also be less obvious challenges that are unique to this period in time. Paying out increased health benefits, for example, will be a special challenge for enterprises that leverage any sort of gig economy option.
On the demand-side, if companies like Apple are experiencing diminished sales, you can be confident that just about every startup is going to feel the squeeze. The severity of these shrinking opportunities is going to vary depending on what stage the startup is in (eg seed vs growth) and the industry. B2C companies are far more likely to feel the pressure than B2B providers, though both groups are going to be challenged.
Given the growing awareness of how bad this situation will be, more and more founders, funders, and gurus are advising startups to take the situation seriously and start taking steps to address it before it starts doing damage. Some of this advice is general. Classic caveats like raising money when you don’t need it apply, as does finding opportunities to minimize costs, and being clear about how these adjustments will impact your previous sales forecasts. Founders and CEOs should also think about how they want to manage communication. Finding a balance between caution and overreaction will be key in maintaining confidence in your work force.
There are also specific operational steps startups can take to get ahead of the crisis. Remote work options are likely to become much more popular. Pairing this with greater flexibility around schedules, greater allowances for personal time, and much clearer objectives around deliverable requirements will help make sure that you are getting the most out of your employees’ time when they have it. It would also be wise for more sales efforts to focus on bringing in several smaller contracts instead of trying to land whales.
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As challenging as the coming year is going to be, economic downturns do not need to be seen as death sentences for small and medium sized businesses. Zillow, Airbnb, Square, and Stripe are just a few examples of companies that survived and thrived during and after the global recession. This will be a chance for founders to demonstrate their true entrepreneurial mettle.