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Shake-up of the Startup ecosystem, back to the finance basics

Our Perspective on the Long-term Societal/Financial Impact of the Pandemic — Part 2

In our previous post, we discussed our macro-level predictions on the effects of this massive shock to the world economy and to society at large. How about the startup ecosystem at the micro level and the related investor behaviour?

Bring me the money?!

Startups who are in need of urgent cash already began to feel the pain as investments dry up overnight (with the exception of investors’ honouring their prior commitments). On the other hand, once the dust settles, this means startups could expect less competition in light of stretched investment and hence a run towards high quality products with profitable business models and resilient and responsible founders. Companies can focus on building those products instead of competing against each other wasting valuable resources. Technology innovation doesn’t stop and doesn’t care about the stock market, so there will be investment albeit smarter than before as expected in a bear market.

How to manage the immediate situation and shortness of breath?

Conventional valley wisdom in times of crises is to cut the costs and focus on the runway (24 months, hmmm?). Well, what the conventional valley VCs don’t know is, smart startups and smarter investors in some emerging markets have always focused on the runway; they always had to bootstrap, mainly because they never had VCs flushing money in these markets for many reasons but pattern recognition and in-group bias to name two. It is very likely that well known European or valley VCs will approach emerging markets and will be in more collaboration with local ecosystems. This will be the time to turn the tables and learn from those low cost, high quality, creative productions in these markets and choose wisely the right startups to invest.

Fast and light on their feet

Startups should continue to focus on their runways and financial health anyways, and investors need to be more patient. There’s value in that statement, and in fact, startups who don’t have a loooong runway, will turn out to accept a large discount in their valuation from investors. They all need to be asking themselves; do we need that office space, or do we really need to move to the West Coast to attract investment (Bay Area is one of the most expensive places in the world) or any other popular startup cities to develop that wonderful piece of software or hardware, or can we still hope to benefit from the diminishing founder network effect in those places? There are many successful startups with talented founders outside of the valley bubble, who have been running at much lower costs from the beginning and are ready to capitalise on that in this environment. They also need to be quick to spot the current opportunities and pivot promptly without compromising their long term strategic goals.

Startup label doesn’t mean that you belong to the new economy

One of the major reckonings of this shock has been the total collapse of supply chains. Except in the movies where you see cataclysmic events such as nuclear holocausts, a total stop of every facet of production almost never happens. Well, until now! Most startups are built on top of the existing infrastructure, distribution channels and regional and global supply chains. E-commerce is a good example of this, or the so-called digitised services which collapsed due to massive run on their products (it’s reasonable to expect the opposite in the post-crisis period as the consumers’ appetite to purchase will probably be much less). This will be the time to have a wider look at ‘what makes their world possible’ and think more about infrastructure investment. States cannot make this on their own; private companies will have to have a skin in the game. 5G is going to happen for example, but should it be just left to the telecom companies requiring billions of dollars investment which will take longer than what it took for 4G to pay back and be profitable? On a similar note; ‘lifestyle’ companies pretending to belong to the tech world or the ‘real estate’ businesses presenting themselves as startups will not fly anymore. This category includes incremental-value-add-software as well.

To sum up; maybe we can only observe the tide of events at the macro level for the time being, but we can be helpful for the startups at the micro level. It is their time to shine with the right focus on fundamentals of company finances, learning to lead and produce in a fully remote fashion, getting the right investment at the right time no matter where they are and who they are or whom they know.

As part of our mission, we take the pledge to help startups to get back on their feet who stumbled due to this shock and work with them and the flourishing many others, for their long term growth strategies, with a fundamental belief that what drives this ecosystem is not the capital per se but irresistible ingenuity and ambition of the startups.

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