As I’m writing this at the height of possible COVID-19 induced recession, I’m consciously keeping the content generic to be applicable for future recessions and bad times; which there will be plenty of.
Pandemic has forced lockdown in several countries forcing the small businesses to close its doors, some may never open again as retail businesses tend to have very low runway. We as a community should do everything possible to survive this crisis and build resilient business which can survive future hardships.
Current situation has caused inconvenience to many startups and have been very kind to certain category of startups. If you are one such startup which has been lucky, then all you need to care about is protecting your employees and serving your customers to the best of your ability.
If you had been planning on implementing a strategy which could improve capital efficiency such as reducing Customer Acquisition Cost, reducing Infrastructure Cost by moving to cloud, reducing Recurring Expenses etc.; now is the time to do it.
May be you had postponed implementing such strategy as it required some effort, you were growing fast and that you had significant runway. Now that all those are under threat, it’s time to implement your best strategy to be more capital efficient.
Startups which serve enterprise clients and multinational companies which are directly affected by the slowdown e.g. in this case Airline Companies, Tourism Companies, Oil and Gas Companies(different reason), Insurance, Hospitality etc. are in turn severely affected as well. Contracts gets closed, payments gets delayed or worse never arrives.
Startups serving such clients should proactively diversify to offer their solutions to industries not directly impacted by the recession and follow other mitigation measures listed below.
Diversification doesn’t necessarily need to be in B2B for a startup operating in the B2B segment or in B2C for a startup operating in the B2C segment; B2B startups can look for opportunities in the B2C and vice-versa.
Diversification is hard, especially when switching the product line-up entirely; but at the end of the day Business is all about being where the market is.
One radical diversification story which comes to mind is that of Nolan Bushnell’s move from Atari to Chuck E. Cheese. Nolan, co-founder of Atari the OG of the Video Game industry went on to create Chuck E. Cheese a pizza joint with arcade games, just because those who hosted arcade games made more money than those who made those games(at that time).
With great distress, arises new problems and with it new opportunities to solve them. Not only that, economic distress can pave the way to solve existing problems within our startup.
Startups looking to venture into Retail, can now find places for rent at bargain in prominent locations as bigger retail shut shop due to recession.
Recession forces consumers to become value conscious, their senses gets tuned to detect greediness of corporates; this creates a gap for startups to enter with their value focussed products in the segments which was dominated by large corporations.
If your business is eligible for financing options and if your startup doesn’t have runway for next 60 or 90 days then it’s time to consider those options now.
If there is a line of credit available for your business, then it’s the time to take it. Line of Credit(LOC) allows startups to take credit from previously allotted amount limit with interest for the amount used.
Invoice financing allows startups get credit against their pending invoices for interest. Startups serving Enterprise customers can exercise this option to get immediate capital without the client knowing about it.
Startups can sell their invoices to invoice factoring companies for 20%-30% fee on their invoice amount if the payment is delayed and if the financial reputation with the client is not a concern. Invoice factoring agencies would collect the payment directly from the client.
Startups with good credit rating would be eligible for a term loan from most financial institutions. Term loans are a good option for immediate liquidity and longer repayment options but comes with higher interest rates.
With greater insight into a company’s health, some financial institutions have started giving loans at flat fee. This is a good option if you are concerned about indirect interest charges, collateral, late fees etc. But, the availability of flat fee loan from reputed agencies are minimal.
You can find a list of finance companies offering Line of Credit, Invoice Financing, Invoice Factoring, Term Loan and Flat Fee Loan at StartupToolchain.
Governments tend to offer stimulus packages during economic slowdown, look out for easier loans for small business, loan and tax deferment announcements from the respective agencies.
This is the hardest and harshest of the mitigation measures for the survival of a startup during an economic recession. But, extracting hard work out of employees during tough times and being unable to pay them is worse than letting them go.
Before unilaterally deciding to lay off your employees, speak to all your employees, get them on-board with the reality of the situation, see if everyone is willing to reduce their work hours instead of letting someone go.
If your startup was already limping and a recession was just the final nail in the coffin; Do yourself and your employees a favor and shut it down.
Don’t subscribe to false ideology of ‘persistence at all costs’ in the startup ecosystem, people who propagate it are the ones who didn’t face the real need to shutdown their Business.
But before you close your doors, do the best you can to help your employees find another job and do justice to your investors(e.g. by returning investment from the sale of products, assets etc.).
If you were planning to launch your startup, a recession can make you contemplate your decision.
As I mentioned in the beginning recessions are not bad for all businesses, recession raises lots of problems and it generally ends well for businesses which solve those problems.
In the current pandemic induced recession, startups which enable remote-work are doing great. As more businesses are looking forward to migrate their infrastructure to cloud for resilience, cloud enabling startups can gain out of this as well.
As many are staying home due to pandemic, demand for Online Entertainment(Games, Video Streaming etc.), Online Education have increased.
As months pass by and people face credit crunch due to leaves, unemployment etc. demand for money lending startups would rise.
If your startup is directly or indirectly involved with the sectors worst affected by the pandemic induced recession such as restaurants, bars, disco, tourism, airlines etc. it’s recommended to take a step back and launch your startup at an appropriate time after analyzing the data rationally.
If it offers any solace, several top companies were started during a recession.
Were you working hard on a product for months, years, were about to launch it and the recession struck? Did your product loose it’s growth steam due to the pandemic induced negativity in the air? Did your clients go bankrupt because of the recession? It’s okay to feel let down.
Talk to your co-founder, family, friends or even email to me about it. Take the time to improve your health, relationship with your family and friends. If you got time in your hands, utilize it to learn the long pending skill which you wanted to learn. Invest the new found vigor to build a better resilient startup.
Compartmentalization could be the key for surviving such hardships, do not put your startup over your personal, family and well-being of others around you.
If you had lost or quit your job due to the current crisis and you are planning on taking entrepreneurship as an alternative; then you should make sure that you understand why does one become an entrepreneur and are you ready to become one. Ensure you have enough financial stability to support yourself and your family before contemplating entrepreneurship.