A startup that recently closed a big round (and the need to close the round wasn’t necessitated by massive debt or existing expenses — so think almost all of the money can be used as future runway) might be in a better short-term position than a business that is relying on net-30 or net-90 payments from clients that might not come and that will struggle gaining new revenue needed to pay bills. This is especially true if the startup can pause or slow-down hiring for now to extend the runway — but that’s a short-term advantage.
Longer term, there is absolutely nothing inherent to being a “startup” that will make it any better at weathering the future than any other type of business. And when investments come back — and it could take years, we just don’t know at this point the extent of the economic situation — it is the biggest/best-connected that will benefit. Plenty of startups won’t ever be able to raise that future round. Plus, they get the additional disadvantage of trying to figure out an actual business model during a recession. At least existing businesses — even if they don’t survive — had a working business plan in place first.
> I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.
This is the only part I agree with. I don’t want to see any business fold — but I’m much more concerned about people who aren’t venture-backed founders right now.
I'm sure most bootstrapped founders are ecstatic that their competitors who have been dumping product at below cost for years are now mostly going out of business. Not seeing much complaining on Indie Hackers.
Given unlimited QE and huge rounds of fiscal stimulus, the financial markets in major developed countries with debts denominated in their own currency are unlikely to suffer for too long.
Once there is a glimmer of hope that Covid-19 will likely be contained or its effects significantly mitigated, the flood of funds seeking yield should start to pour into discounted assets and other investments with good risk-reward ratio.
Looking at Germany and South Korea, mitigation through concerted efforts should be possible within a year or less. Pessimistically, if containment and mitigation fail, the population will have herd immunity by 1.5-2 years.
I think the assumption is that "longer term" is "within your runway" for some set of startups. Early stage startups can have years of runway.
If you're a startup that's recently closed an amount that will carry you through this period I think you're probably in the ideal position. There is an open and obvious question as to how long that may be, but if you have multiple years of runway it feels safe.
this has a bit of a silver lining: it'll help filter out bullshit business models that appear to work in the times of plenty.
This allows certain parts of their business empire to fund the less performant ones e.g. adventure parks. Hilton has no such option, they're quite invested in the hospitality industry which leaves very little room for pivoting.
I can think of a few things:
a) expecting no revenue for a while anyway
b) mostly can work from home / remote
c) early startups can cut back to a few founders on ramen
None of that really applies to mom and pop restaurants / retail etc.
I don't think life is going to change much for pre-revenue startups still trying to find a market fit. Now, they're back to square one working out if they've got a product that can be sold somewhere.. anywhere! Uncertainty continues as usual.
But if a startup had a fit and were marketing for growth, well.. sucks to be them, unless they were in some kind of remote-collab space.
Many, many businesses are suffering in some way, and startups are not impervious to it either - a major question is who is able to suffer through this longer in order to come out the other side alive. The advantage of startups here is that they have more direct “supply lines” to capital to “hold out through the winter” whereas businesses relying on government help and bank loans are not in as good of shape to survive when depending on indirect third-party capital.
Long-term, this sucks the most for non-venture backed companies if they can’t hold out and die, or make it through and are hampered with debt so much that they are handicapped from returning to normal for quite some time. Conversely, I think this is where investors and venture-backed startups will see an opportunity to thrive because they could easily “sink the damaged ships” and corner markets in a new wave of cheap M&A deals and market share growth.
Startups lose money, which means they are usually raising capital for runway, and can conserve as well.
Moreover, many startups don't have working capital requirements, retail rents, inventory etc..
Finally, a lot of products are digital and some booming.
So it's fair to say many startups have an advantage.
A friend’s medical practice will implode April 30... their business is down 90% and they won’t be able to pay rent or the employees. They are only staying open in hope for some sort of aid or debt jubilee. The partners will lose pretty much everything.
People with cash aren’t going to keep plowing money into startups, they are going to buy depressed assets. Every leveraged real estate company will be broke in 90 days or less.
But honestly I think it's too complex to attempt. Perhaps some form of managed debt jubilee will work "no rent for six months" or something. but the unintended consequences will be huge.
Good luck to your friend
Edit: we should probably focus on the areas that can be easier made whole - finding landlords with extant contracts and just paying them for the contract will be easier than getting their tenants paid, finding businesses with employment contracts easier than paying individuals...
I wouldn't imagine they are a GP? This crisis would increase their traffic. Cosmetic surgery?
In 2001, VCs actually pulled back investments from startups. People think that once cash is in the bank it's theirs.
That sort of startup probably also counts as a “traditional small businesses.”
Startup = Growth
Companies large enough to serve multiple different organizations may be able to re-balance their services.
That’s not a negative despite what the tech bro’s think. I hate the idea of success for a company seems to be “we got another round of funding while losing money”.
By contrast early generation SV companies took relatively small amounts of funding if at all. Intel for example took the equivalent of $18.4M US in 2019 dollars prior to IPO. [1]
And with all the stories coming out of Berlin's scene, and to a lesser degree Munich's, I came to the conclusion: "lifestyle businesses" businesses without external funding are hard. They are traditional small companies, the have to rely on positive cash flow, profitability and banks to keep running. Quite tough, especially if the founder and employees have to actually live from the profits.
Startups on the other hand, they life of VC money. As long as the founding team can sell their vision to VCs to get more VC money, they run just fine. So the founders can live the startup life with other people's money. Sounds more like lifestyle businesses to me.
At least that is how lifestyle business is slung here. No one in my local business association would scoff at businesses growing at a healthy pace and no debt. Also nice if no VC gives me another round, I don’t have to shut down tomorrow.
We're lucky to have a customer base that spans many industries. We've lost some chunks of income.. chains of malls closing, restaurants, lobbies, DMV offices, customers getting live sports info.. but it's all temporary and we're well in the black. Instead of worrying if we'll make it we're looking for opportunities and how we can best take advantage of our strong position.
If there is a profitable decision I could take, like investment / partners / whatever, I prioritise the fact that I want to keep running this company myself without interference over profit. I prioritise my job satisfaction.
Maybe I could hire a more competent CEO, but that's not what I am trying to do here. I could get a mentor thou.
This business could be funded by debt, or investment, though not normally.
Now I might make a lot of money and grow the firm to 10k people, or I might take long holidays and go bankrupt - that's a different problem entirely.
Arguably with current rates we are going to have cheapest money ever possible. On top of that a lot of traditional investment vehicles are contracting.
On the other hand large funds like SoftBank are clearly under-performing. Cracks in that model were already appearing prior to Covid-19. So yes, interest rates are low, and equities should benefit in general. However it does not follow that VC investment funds are overall a good bet. To make that argument you would have to trade off against alternatives like real estate, more traditional industries, on-shoring of supply chains, etc.
- Mark Cuban
Otherwise, "just" spending less than you make and trying to make it on their own only makes them bootstrapped, don't you think?
And I imagine some of those clients may have money problems resulting from the crisis too, directly or indirectly. Nobody is totally isolated.
One might argue that the signal indicated lower risk, but this runs at odds with the mission to find potentially large payoffs. That is, derisk enough, and you de-reward. Add to that, that there is no "sure thing", or ultimate de-risk. There are no silver bullets in this process, and signals you think may indicate one thing, actually indicate something entirely different.
The markets present an even more compelling opportunity for high risk return at the moment.
I'd argue that VCs (being opportunists at heart) are very likely to redirect funds and shun startups for a while e.g. likely as long as post tech bubble timeframe.
“By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.”
The economic fallout from this is going to be huge. And if you think tech startups are immune to that you’re in for a shock.
It's a global turmoil and it's too soon to make assumptions about how great of a shape we're in.
Are we better off than baristas? Likely.
Startups are not in any way, shape or form, "better" than any other traditional business. In fact, maybe worse.
Recently-funded or reasonably conservative startups should be able to do okay with that, but ones without a lot of runway are going to be in a really difficult position.
I'm not saying they are wrong. But the premise that anyone has a fucking clue what's going to happen on what timeline is ludicrous.
When you get old and wizened you'll notice the pattern whereby the VC investor types will express the same certainty about everything all the time, even when shifting their opinions 180 degrees regularly and pretending like they've held their most recent opinion the whole time.
Even after September, there will be a lot of unknowns with massive economic implications. Will cruising recover in 1 year, or in 10 years? How much more friction will there be on international travel, and for how long? What's the risk of a coronavirus resurgence, both globally and locally? How different will the new crop of small businesses be from the ones that got eliminated in the shutdown? If you're going to give a startup huge chunks of cash, you need a high degree of confidence in the mid-term future, and in most areas that won't be available for a while.
* Cruise firms pay their taxes and aren't allowed to use flags of convenience
* They're required to look after and pay their staff properly
* They're required to dramatically improve their fuel usage and efficiency
* They're required to protect the environment, in particular their mooring and waste disposal practices
* They're required to improve their onboard sanitation so that the spread of noroviruses, bacterial infections and other transmission is much better filtered and controlled.
What just happened in my industry, is forcing me to go look for a job. I don't think we are going to open for summer season or even if we do its not gonna make enough to live by.
Hundreds or thousands of years ago, a few had all the wealth and then most people were poor. We even had slaves.
I can't believe that in 2020 and with all the knowledge we've acquired as humanity we've allowed a few people to acquire all the wealth.
I am gonna struggle with paying any tax coming my way this year, or even supporting my employees who they very much need the job. And on the other hand, there are corporation that don't need to pay much tax through their umbrellas and then again they pay their employees peanuts so they can have a CEO that is worth in the hundred of billions of $. Sad to see that humanity hasn't improved at all.
But it's not this way everywhere: there are countries (I'm thinking of Scandinavian) where inequality is perhaps not so bad, and there are countries where governments are making major and genuine efforts to support businesses and people who are at risk of (or who have) lost their jobs due to Covid.
There's bad leadership and bad behaviour in many places, but not everywhere all at the same time.
So I believe GP's point still stands - humanity has not learned the lesson from thousands of years of its history.
Good points about the numbers
This is the most prosperous time in human history. There are more people alive right now than ever before. They live longer healthier lives and they’re more educated than ever before.
On every continent but Africa people are richer now than was the case after WWII. In the US, the richest country that has ever existed people are just coming out of one of the longest economic expansions in history.
Startups with a little bit of runway have to cut costs now to extend it, i.e. staff cuts, or they're also on a short spring towards insolvency. All business negatively impacted right now are extremely adverse to new expenditures for the next few months, and might only be slightly less so for the next six months to a year after that. All spending not absolutely essential to keeping the lights on is getting cut.
My workplace had contracts with a number of startups (and some more established) that provide industry-specific services, and as a matter of course we insist on a "force majeure" clause in contracts. As a result we are strongly moving towards terminating those contracts. We are considering it even for one or two that are close to being mission critical, because revenue loss just through June is in the range of $30,000,000. That represents roughly a 40% drop over expected revenue for that time period. Projections for the next quarter are much, much worse, even in an optimistic "we might be slightly less restricted as a society in 2-3 months" scenario.
Given this environment, startups that do not supplant an existing service for a lower cost, have VC confidence and can "hibernate" for a time, or some other type of product that can help businesses stem losses rather than just make some activity slightly easier and more seamless... only those startups will weather this storm.
This is completely contrary to what common sense would tell you if you ask yourself "what corporation would best survive a depression". Pick and choose any qualities, any sector, any background and be honest with yourself.
My bet for what company I would prefer to own is something along the lines of:
- Industrial manufacturing of common goods that are necessary for people, not industries, without many external factors where you are not exceedingly (more than others) exposed to price fluctuations of other goods. This could be ketchup, medicine, toilet paper, you name it.
- A long history of sustained profit leading to cash on hand which you can use to compensate for downturns that you can be almost 100% sure are temporary.
- Infrastructure in place that you can scale down and then back up without losing massive amounts of competence or inventory quality.
Here's what I wouldn't like to have:
- Complex technical software development that is completely optional for both people and industries, completely dependent on external factors and therefore heavily hit by economical downturn.
- An unknown company with no history (startup) with zero cash on hand to compensate for a downturn that you can't even know if it's temporary or if you need to pivot completely.
- Severe penalties for scaling down as key intellectual competence disappears from the company, causing double work when resumed and possibly a lower quality product going forward, making it even harder to sell.
I'm not trying to get you down, but don't kid yourself. This is definitely not the type of climate where you would elect to be a tech start-up.
You're absolutely right though. There are folks who are getting decimated who are part of the sustaining normal economy, and comparatively speaking having a "war chest" of capital, either VC supplied or otherwise, is a much more comfortable place to be.
Why is that restaurateurs deserve a special shake when your local HVAC guy does not, especially when the margins are so thin probably because they cant charge a premium for their offerings as they don't offer anything distinctive or compelling?
My comment was calling into question the viability & competitiveness of most restaurants that cannot weather a sudden change of fortunes. They are not be confused with long-lived, well-run and meticulously managed restaurants that stand the test of time because they offer something compelling. Most restaurants don't fit that bill and never had those ingredients baked into their DNA, to begin with.
Peter Thiel has opined on this in splendid detail:
In 2001, my co-workers at PayPal and I would often get lunch on
Castro Street in Mountain View, Calif. We had our pick of restaurants,
starting with obvious categories like Indian, sushi and burgers. There were more
options once we settled on a type: North Indian or South Indian, cheaper or
fancier, and so on. In contrast to the competitive local restaurant market,
PayPal was then the only email-based payments company in the world. We
employed fewer people than the restaurants on Castro Street did, but our
business was much more valuable than all those restaurants combined. Starting
a new South Indian restaurant is a really hard way to make money. If you lose
sight of competitive reality and focus on trivial differentiating factors—maybe
you think your naan is superior because of your great-grandmother's recipe—your
business is unlikely to survive….
The history of progress is a history of better monopoly businesses replacing
incumbents. Monopolies drive progress because the promise of years or even
decades of monopoly profits provides a powerful incentive to innovate.
https://dealbreaker.com/2014/09/peter-thiel-will-not-be-open...
> In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View, Calif. We had our pick of restaurants, starting with obvious categories like Indian, sushi and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was then the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother's recipe—your business is unlikely to survive….
> The history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.
Starting a restaurant because you think your great grandmothers naan is superior is not dumb.
Neither is it dumb to start a restaurant because you love feeding people, or a bike shop because you love repairing bicycles, or <insert any other scenario>.
As long as you know what you’re getting into, it’s a perfectly honorable way to live your life and there are ways to make it work.
EDIT- at least there were ways to make it work during non pandemic times. I hope we will see an upswelling of these types of businesses in the wake of this, although you couldn’t pay me to take bets on a timeline.
If you are having to seek alms just to pay the bills or resort to charity to even sustain yourself as a restaurant, there is something fundamentally wrong with the makeup of what you offer. Simply put, far too many people think they have what it takes to run a restaurant. Their abilities and resourcefulness cannot match their over sized egos.
If future rounds aren't coming (guess what, in this economy, they aren't), you extend runway by cutting expenses. Anyone with a career older than ten years knows how this will go.
You don't have to be dumb to be inexperienced. An awful lot of startup founders are young and were propagandized endlessly about being entrepreneurs, etc. Downside risk is an alien concept to many of them. Many of them do not actually know how to cut expenses because they've never known a time when the now-no-longer current fluffy, cushy environment wasn't standard.
There are lots of startups that sell physical products. I work for one of them. We're doing pretty great for now (we sell, among other things, toilet paper and hand sanitizer / soap and cleaning supplies), but we also recognize that we're lucky, and that luck is unlikely to persist if this "great unwinding" lasts longer than the COVID-19 panic unless we do everything in our power to reduce costs and extend that runway as long as possible with the current tailwind. Most startups selling physical goods ain't so lucky (see also: the ones in the article, even if the article didn't really go into much detail on it).
No you are not designed to weather this cataclysm. Especially a start up. This is the great cleanse. 2008-2020. We had a good run!
On the other hand my experience with slightly bigger suppliers/vendors with 5+ employees is that they run into cash flow problems all the time and do in fact seem much more vulnerable to this shock than a startup with no inventory and cash on hand.
Only exception I'm seeing are restaurants and shops with large inventory and a lot of personnel.
It would be foolish of them to fold instead of getting loans. And it would be foolish of a bank to deny a good business a loan to get through the next couple years. I think much of the moaning about closing up is to encourage low-cost loans. Which is fair, because the government should be subsidizing such loans to lower the bar for a "good" business.
Even if you have months of runway, vc’s are going to be very tight about funding for the next two years at least.
This will likely become a lot more difficult over the next couple months or longer.
They are in no way shape or form better suited to weather an economic collapse than a traditional business. Traditional businesses know how to turn $1 into $1.01.
Yeaaaaaah, about that...
A whole load of VC stuff relies upon the larger market to predate, has stupidly vapid IPO targets (which the actual big boys, Central Banks, are now culling off, since their actual liquidity stuff like Reits etc are crashing) and basically 100% worthless business models.
"Juicer" or whatever it was?
Go look up what Glencore is doing (20% emerging markets just disappeared) and get back to this thread and start figuring out an exit.
No-one in this thread seems to note this: try finding some ex-Soviet citizens who lived through 89-96 and ask them some serious questions.
~
Seriously: I was told HN was were the semi-smart tech people hung out.
It's like WeWork in here.
Entire industries are pretty much relying on bailouts or they fold (leisure, air (non-freight), cruise, hospitality, restaurants) and the people who own the real estate (or lend it out, Reits / Mortgages) are going to get hit by their tenants / clients being unable to pay.
You're not in the "ramp to land" scenario - you're in "this VC is going to look at the contract and claw back the largest % of capital they can, in the next 4 weeks, due to margin calls and other commitments".
Anyhow: no-one will read this, but it's fair warning to you guys. You're about to get frack'd, hard.
(For whatever little it's worth, I suspect your assessment is correct.)
If there's one thing the dissolution of the Soviet Union proved, it's that a complete economic and political collapse does not prevent people from disrupting markets. Many Western companies got their first foothold in the region during that time.
Do you expect the Martian Axioms to help you?
By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.
Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased operations overnight.
My friends and family in startups are doing fine, for the moment. It's those that chose to work at the more stable, traditional work environments that are getting wiped out, and much less likely to return when the economy starts back. Because when it does, there will be money ready for investment - extending your runway to get there for a startup is more straightforward. But when you're a bigger business with little cash and no-one is buying assets right now, you literally are unable to make any decision to help.
I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.