How Might COVID-19 Impact the Startup Community?
March 19, 2020
By Alan Wink
With the stock markets looking at Great Recession-like numbers and equity valuations in a free fall, what does all this mean for entrepreneurs trying to raise much needed capital for their startups? There is a tremendous amount of uncertainty in the market right now as a result of COVID 19 and, as you know, the markets abhor uncertainty. The result: panic.
The past several years have seen venture capitalists (VCs) invest record sums in early-stage companies. This easy access to dollars has allowed entrepreneurs to spend dollars quite aggressively, some may even say recklessly, in order to fund top-line growth and not necessarily concern themselves with profitability or even cash-flow breakeven. The global spread of COVID-19 will certainly have a negative impact on valuations as well as make it more difficult to raise money in the short term.
VC investment could literally come to a halt in the short-run, due to the new acceptance of social distancing, and many organizations are canceling face-to-face meetings—such as pitch meetings and due diligence meetings—perhaps in favor of virtual ones. But virtual meetings can only go so far. Will social distancing prevent VCs from completing their due diligence and eventually writing a check? Time will certainly tell.
Entrepreneurs are going to have to re-think the road to profitability for their companies. Expenses might have to be cut and growth slowed in order for companies to minimize cash burn and eventually get to cash-flow breakeven and profitability.
We are all hopeful that the current crisis is only a temporary blip. With that in mind, entrepreneurs should consider the following:
- Use available cash efficiently and effectively.
- Raise the amount of capital that you need, not what you want.
- Accept the fact that valuations will not be as frothy as they were a few months ago.
- Determine how your company can achieve short- and mid-term profitability.
A crisis often means getting back to basics. It’s no different for VCs and entrepreneurs. And, hopefully, at the end of this coronavirus tunnel the startup community will be stronger as a result.