Startups

Crises are underrated: finding the silver lining of COVID-19

A person dressed in a bright yellow hazmat suit and respirator

The recession resulting from the Covid-19 pandemic may be the largest we have ever experienced. Everybody staying home initiated a huge chain reaction that is laying waste to the global economy. First, transportation ground to a halt with a 95% drop in the US alone. The airline industry has been hit hardest; of the 24,000 planes operating globally 16,400 are grounded.

The hospitality and real estate industries followed with any industry involving human interaction devastated. For the first time in history, oil was traded at negative cost. While many predict very hard times ahead, I predict that this crisis will result in an explosion of growth and development over the medium-term.

Contents:

    This was always coming.

    And many investors were ready

    Although before Covid-19 arrived nobody knew what the exact cause of the next economic crisis would be, there was plenty of speculation about a coming recession among analysts. Warren Buffet and Jim Rogers had been discussing the possibility of a major recession as early as 2017, identifying the year from 2019-20 as likely to bring the worst crisis in a generation. Despite being ignorant of the exact cause, many investors have been preparing as a result, selling assets in expectation of a severe shock to the global economy.

    Venture capital and startups were going crazy

    The runup to the present crisis was also characterized by some very unhealthy behaviour in the tech industry, not least among startups. Fast growth at any cost became the only reference point for decision making. Investments were often made on the basis of an imagined problem; if you could point to an ‘issue’ or a ‘pain point’, that was often enough.’ Massive capital investments would follow, often folded into bloated advertising budgets to win over potential users. An early example of the fragile businesses that resulted was Juciero; a juice producing startup which secured 120 million USD of investment. All it took to bring down was a negative story by Bloomberg.

    Mark Zuckerberg’s notorious mantra ‘Go fast and break things' was embraced enthusiastically by many growth-hungry businesses, some going so far as to break the law itself, as Theranos illustrated with spectacular shamelessness.

    Another company frequently clashing with the law across multiple jurisdictions, Uber cultivated a cult following. The company typified a ruthless approach that has inspired a generation of founders trying to build their own ‘Uber for X’, often without even the pretence of understanding the technology behind Uber’s success.

    But the ‘success’ of Uber is debatable. Certainly, the founders became billionaires. But the cost has been the devastation of certain industries, the replacement of secure with insecure work, and huge scandals rocking the business community. Despite these costs, Uber has yet to turn a profit (which is not to say that some people did not personally become remarkably wealthy).

    Arrogance, law-breaking, and growth-above-all became the new sexy.

    The over-prioritization of growth established an interesting new dynamic. Fast growth required fast hiring. As a startup after startup followed this same path, salaries grew exponentially.

    And the speed of growth demanded by founders and investors meant there was no time to spend building a reputation as the basis of their relationship with the public. Instead, advertising was seen as king and king-maker. Chamath Palihapitiya, founder of Social Capital may have made the point most succinctly in his annual letter to investors; “Startups spend almost 40 cents of every VC dollar on Google, Facebook, and Amazon.” And there were a lot of dollars spent.

    As long as only a few were spending aggressively on user acquisition the problem was manageable. But with every startup scrambling to spend as fast as possible, the cost of ads couldn’t go anywhere but up. Fast.

    Long term strategy was not of interest to most startups or venture capitalists. Former Uber manager and general partner at a16z Andrew Chen stated this explicitly:

    A Tweet from Andrew Chen stating that SEO requires too much time and effort to create 'a lot of traffic.'

    Andrew Chen is not a fan of SEO.


    Ridiculous as it may seem, six months became ‘too long term’ to be relevant to startups attempting to grow at blitz speed. As a result, SEO became increasingly irrelevant, leaving paid traffic as the obvious focus for marketing teams (at least within the reality distortion field of ‘the startup scene’).

    And this paradigm was truly bending reality for the parties involved. The laws of economy and business no longer seemed to apply. The epitome of this investor-funded may have been WeWork.

    WeWork is a short term office leasing business that somehow became a technology company. When their financials didn’t check out, they simply invented their own. You can think of it as “community adjusted EBITDA”. Essentially, their EBITDA wasn’t looking so healthy, so they decided to simply not account for one of their biggest expenses.

    When their IPO didn’t happen, their valuation plummeted from $47 billion to $10 billion. After the CEO was removed the investors created a plan to save the company, as this graph illustrates:

    A graph with almost no information ostensibly shows 'improvement.'

    Thanks to FT Alphaville for sharing this 'unique' visualization.


    Note that the Y and X axes have no assigned values.

    The divorce between the world of tech investment and reality has been exacerbated by the technological disparity between the private and public sector.

    On one hand, Facebook has the technology to grant their clients the power to manipulate elections worldwide - whether they do is a question for another article. At the same time, governments are losing the capacity to manage data because they’re running on legacy languages like COBOL.

    Reframing the problem

    One instinctive of a business decision maker during a crisis like Covid is to simply hang on to their and survive, whether that means keeping the business alive or keeping their job. And sure, survival is non-optional.

    But by focusing purely on the short-term, business leaders risk missing the excellent opportunity provided by the shifting tectonics of the crisis to hit the reset button on their long-term thinking. When the world is being turned upside down, the future belongs to those who take the time to plan for the new normal.

    Even if the economic setup that emerges doesn’t match what came before, one thing is certain; it will eventually stabilize. We can also be entirely confident now, as we head into Summer 2020, that the world after the crisis will be quite different in several important ways.

    Clinging to the past won’t prepare us for what’s coming. It’s time for a rethink.

    Preparing to ride the next (market) wave.

    Previous recessions didn’t require us, as humans, to make fundamental changes to our behaviour. The present one does. The recessions of the past certainly presented their own difficulties, impacting industries, governments, and individuals. To cope, people might adjust to the changed economic climate with primarily economic measures such as securing a new job or starting over with a fresh business in a new market.

    But they didn't have to change their core personal habits, like the way they lived, travelled, socialized, or even ate.

    Of course, people have changed their behaviours before - but usually the pace has been gradual and focused on a fairly defined area of life, even if it felt like transformative social change at breakneck speed at the time.

    Since the nineties, a technological revolution intimately connected to behavioural change has been ongoing, with the internet, social networks, smart phones, cloud computing, and recently AI, each new development building on what came before and unlocking new potential that had been nascent in the existing technology.

    I’m not claiming that every innovation has had the same impact. While social networks have undoubtedly exploded into our world, uprooting past certainties and throwing up an incredible array of opportunities, it’s hard to make the same case for 3D printing or augmented reality devices like Google Glass (at least for individual consumers). But we’ve seen huge shifts before, and some pre-millennial enterprises haven’t just survived. They’ve thrived.

    But this past era was driven by what you could call ‘positive forces’. Companies elected to computerize, seeing the opportunities that a digital future presented. Individuals saw the benefits of smartphones, they wanted them, and they bought them. They weren’t forced into the change.

    The same cannot be said for the changes we’re witnessing today. Simply to maintain their usual activity, people have had to embrace significant changes that we can expect to stick around. Companies large and small know that even after the initial threat of Covid-19 recedes, they need to be ready for the next global pandemic or comparable crisis by operating in a way that drives down their risk.

    So, we need to think hard about building new solutions fit for purpose in the post-Covid-19 world - a less innocent world of remote work, continual contingency planning, multiple redundancies, and nervous markets. As Greg McAdoo, partner at Sequoia Capital once said, ”If you want to build a truly big company, you’ve got to ride a really big wave. And you’ve got to look at the market waves and technology waves in a different way than other folks, and see it happening sooner, and know how to position yourself out there.”

    This crisis will bring a huge wave - perhaps a tsunami - of new technological solutions. Those who want to ride this wave must get to work developing, crafting, building, and creating as soon as possible to avoid being left behind.

    Crises are nebulae for tech giants

    After a star explodes in a supernova, the cloud of dust and material it propels into space don’t just sit there. With time, gravity pulls all of this ‘star stuff’ together and, in the fullness of time, new stars are created. It may not be a perfect metaphor - all of this happens very slowly, after all - but I think this captures the idea that catastrophic change can represent huge creative potential.

    Yes, I am building up to a list of impressive tech companies that began their journeys in times of crisis. Here it is:

    Google (1998) Although Google wasn’t technically established during a recession it was founded on the eve of one. This turned out to be extremely valuable for them, as the majority of the competition was wiped out when the dot-com bubble burst. Google’s resilience lined them up for an open goal - making the internet accessible. The rest is history.

    Salesforce (1999) Like Google, Salesforce was started just before the crisis hit the market. Just as pets.com and other online companies were crumbling, Salesforce was the first pioneer of the digital cloud concept - which you can still see in its logo - and the SaaS model.

    Slack (2009) Leaping forward ten years, a group of developers failed in an attempt to build a game. However, an internal tool they created to communicate with each other during the project turned out to be a platform that transformed business communication, for on-site as well as remote workers.

    Uber (2009) Originally named Ubercab, the company was founded at just about the worst point of the Great Recession recession (March 2009). Since then Uber has become one of the founding companies of the gig-economy and had a huge impact on the global taxi business as well as transportation more generally.

    Airbnb (2008) Founded just before the start of the last (until now) financial crisis, Airbnb became famous for its Craigslist growth hacking. By 2017, the company had approximately the same number of rooms as all of the top 5 hotel chains in the world combined.

    Given this history, we can see that the economic impact of Covid is as much opportunity as tragedy. Right now might be one of the best possible moments to become an entrepreneur or simply operate in a more entrepreneurial way, no matter the size of your business. Moments like this are rare.

    The market transformed

    You won’t have won any prizes for predicting that companies like Netflix and Zoom would be among the first big winners from the recent changes. But by focusing on cases like these we fail to observe the dynamics playing out as businesses vie for success across a range of industries.

    Let’s take a look at some of the other major shifts, because the economy is bigger than streaming video and remote conferencing.

    Cashless payments are safer payments

    Money moves the world. Or more accurately, money moves people around the world. They go to work to get it, and they go elsewhere to spend it. Or at least, that’s how it used to work. Covid has changed that for many of us, and going to work now means going to the couch.

    Yet as some jurisdictions ‘ease restrictions’ and we move towards a (hopefully) post-Covid world, in-person payments are likely to become more common once again. But that doesn’t mean that everything will go back to how it was. Many are rightly cautious about returning to the old, contact-heavy ways of doing things, and little changes that reduce the risk of contagion are likely to prove popular.

    Paying for and receiving goods and services is arguably the highest risk activity we engage in with strangers on a regular basis (unless you’re a big party person). But even if you are, buying drinks using cashless (and contactless) payments is one thing you can do to reduce your need to touch surfaces - or fellow humans - that could infect you.

    Of course, cashless payments predate the current crisis. Advancements in fintech and new legislation (particularly in open banking) have led many of us to start paying with our phones and created companies like Revolut and N26 that allow for easier management of our finances.

    But despite this, the use of cash or even cheques was still commonplace in many countries of the developed world at the time of the outbreak. One 2016 study conducted in the US revealed that 97% of SMB still relied on cheques to handle a substantial portion of their transactions. As recently as 2017, 74% of all German domestic transactions were completed with cash. Japan also lags behind comparable nations with the government hoping to increase cashless payments to 40% of transactions by 2025.

    While anyone relying on traditional news outlets might assume that cashless payments are already the norm, this is true in only relatively few countries. There’s a long way to go before cashless payment goes mainstream. But Covid-19 has boosted the perception that accepting cash payments poses a risk to public health. We can expect to see a rapid acceleration in the rollout of cashless payments from which fintech startups will benefit greatly.

    Accelerating the digital transformation

    Before the pandemic the term digital transformation was used to denote the phenomenon of enterprises integrating digital technology in their business processes to change the way they delivered value to customers. The virus has pushed the whole market towards digital transformation. Organizations of all sizes - including governments - must now be able to operate regardless of physical disruption, meaning going digital is no longer perceived as a choice. It’s a necessity.

    Let’s take a big-picture look at how this push may affect different types of organization.

    A snippet from Instagram featuring a simple multiple choice survet question. People are asked whether their digital transformation was led by their CEO, their CTO, or COVID-19.

    For many, there was a clear answer.


    Enterprises

    The prevailing effect of the pandemic on large companies has been the growth of all digital channels of business as in-person channels have been abandoned. Seeing the durability of digital operations, companies will invest further in technological solutions. Roles like Chief Digital Officer or Chief Technology Officer will gain more importance at management and board level.

    Their main areas of focus are likely to be:

    • The digitization of formerly in-person interactions, such as the signing of contracts and the delivery of sales pitches.
    • Identifying back-office and operational tasks that can be digitised, enabling employees to work remotely. Why should filing expense reports or requesting holiday need to be done in person?
    • Scaling underlying digital infrastructure to support the new burdens placed on it by the increased activity.
    • Pushing for wider in-company acceptance of agile management processes - and not only in IT.

    This last point is particularly important for enterprises seeking a competitive edge. Just look at SpaceX, who are crushing their competition not because they have better technology but because of their enthusiastic use of agile methods in the development and implementation of that technology.

    SME’s

    The service sector has been the hardest hit during the pandemic. The travel, hospitality, and events industries will likely require many years to recover.

    Consider international travel; the possibility of second and third waves of infection have left many hesitant to travel due to the fear of being stranded abroad. Of course, the restrictions that may apply in other jurisdictions may render travel less appetizing, with two week long quarantine periods, social distancing requirements, and other restrictions making travel for pleasure less attractive to many.

    The food industry has also had to adapt. Many physical restaurants have had to close and those of them relying on a steady stream of tourists may struggle to survive. Some restaurants were able to convert to delivery-only, helping them to generate at least some income.

    However, the real winners are the ghost kitchens who offer restaurant quality, delivery-only meals. We can expect to see these expand further as the habit of ordering-in becomes more deeply ingrained among consumers.

    Food delivery apps such as Uber Eats and Takeaway have also received a considerable quantity of additional business. However, it seems that the outlook for these businesses still includes a potentially unhealthy level of risk, as recently shown by the owner of a pizza restaurant repeatedly buying his own pizza to generate profit due to a pricing mismatch. The question of whether growing market share alone is a worthwhile goal is one that these companies may have to face up to sooner rather than later.

    Other local service providers such as beauty salons will have to embrace the digital world not only to advertise their businesses but as a source of revenue. This could be achieved either by supplementing their brick and mortar operations with a local e-commerce business selling the produce that they already have or by implementing business models widely used in tech businesses like subscription. For instance, Keepitcut already offers unlimited haircuts in all its salons for a monthly fee.

    The talent market

    The pandemic caused the labour market to flip from an employees’ to an employers’ market in just months. Even tech workers are no longer safe. Although this is a horrible situation for many people, many will gain the opportunity to work on personal projects they had intended to pursue but never had the time for. Until now.

    The end result will be more businesses being founded. Hopefully, a greater and more creative range than is normal in ‘ordinary’ times. Fortunately, non-technical founders will have an easier time finding technical partners for their new ventures due to the extra talent available on the market.

    Side note; large companies who used to have a hard time competing with exciting startups and dynamic tech companies to attract top talent may also benefit from the relatively high unemployment rates. With more talent in their teams they’ll be more likely to innovate - a win for all of us.

    This video illustrates nicely how one larger business, GE Digital, was struggling to hire tech talent.

    Although hit hard at the beginning of the pandemic, the so-called gig economy will expand further as the unemployed people look for ways to get by. Many companies will outsource a greater range and volume of business activities to freelancers and agencies as they may lack the budget to keep workers in-house. Adam Jackson, the CEO of Braintrust, recently wrote a fascinating article on this exact subject.

    Think remote is temporary? Think again

    If you attended any business conference in the pre-Covid era and the subject of remote work came up, it was rare to hear ever a single voice speaking of it in anything other than the most glowing terms. Companies like Buffer and Invision were able to build large, successful businesses with their employees operating completely remotely.

    Yet despite growing in popularity, fully remote teams were still the exception rather than the rule, even in the comparatively forward-looking tech sector.

    But now almost all organizations have had to go through a forced adoption of remote work in at least some aspects of their business it’s likely that even reluctant decision makers will entertain the idea of retaining it or even expanding its use when they see the benefits early advocates had been praising for years.

    However, businesses dependent upon servicing offices will struggle as very few companies will return to the old ways. Despite this potential negative impact on the economy, this will likely be balanced by the growth of new services catering to remote work in areas such as the specialization of perks and benefits for those who work from home and those that empower companies to better manage remote processes.

    Startups

    The dynamics observed among startups matches those of the overall market. One survey from Startup Genome states that 74% of startups had to terminate at least one employee and saw declining revenue. Additionally. More than two thirds of startups enacted cost reduction measures. Unsurprisingly, this has led to a drop in B2B deals.

    A graph showing a decline in dealmaking among startups by continent. The decline is steepest in North America.

    Credit: CBI Insights.


    Zero budget operations

    This picture might seem grim. And it is. However, this environment will force startups to obsess over efficiency and productivity, while prioritizing revenue generation. Hopefully, we may see the end of the blitzscaling hegemony.

    Should this be the case, startups will soon begin once more to resemble real businesses, with all that this implies. Once again, tech entrepreneurs will focus on building partnerships and looking for ways to achieve their goals without burning money like it's going out of style.

    Though this will almost certainly slow growth rates across the industry relative to the average of the 2010s, startups will again learn to operate under budgets that may even approach zero dollars, as alien as that now sounds. With this much needed trimming of the fat, by the time growth returns in earnest the industry will be in far healthier shape. We’ve seen what extreme pressure - on both time and budget - can do. SpaceX and Apple during the Steve Jobs era have shown us this before.

    Putting the focus back on clients

    Another major upside of the current economic environment is that startups will no longer have an excuse not to focus on their clients and achieving product/market fit. As funding dries out, founders will be unable to continually chase investment rounds after investment round. At the very least, there will be fewer conferences to attend and pitch decks to perfect.

    With so many users and customers staying home, this might just be the ideal time for savvy startups to forge better relationships with them.

    It’s time to move forward

    This pandemic, although devastating, will trigger some of the largest market movements in recent history. It is now time to embrace change and start building companies and products that are digital by default. We should stop being a passengers along for the ride, always reacting to events, and become the authors of our own future.

    2020-06-0311 mins

    Anton portrait

    Anton Koval

    Anton leads customer development at Develocraft, providing strategic guidance internally and externally. While other members of the DC team can be found playing table football, you're more likely to find him in a corner reading detailed analysis about the economic environment and how tech startups can make the most if it. He's fun like that.


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