Headline Diplomat eJournal – Issue 1
The perilous lenses of COVID-19: The impact on the economy

Writes Sam Steve, Content Marketing Manager, Emira Digital Publishing, LinkedIn

The global economy is experiencing an unprecedented upheaval due to the COVID-19 pandemic.

The world is over-scrambling to contain the virus spread, while equally minimising its impact on the economy and the healthcare system. A historical lockdown has brought everything to a grinding halt.

On the economic front, massive stimulus packages were rolled out to help citizens weather the impact of the loss of income.

Businesses are not left out in the scheme, either. Despite the economic stimuli and the palliatives deployed to help organisations get through the crisis, everyone seems to go through repeated shocking waves. The startup community is left in a state of anxiety and confusion. Do they move forward or stop all operations?

Test of resilience

The crisis has presented a unique chance for founders to test their organisations’ resilience. Managements can see, in real-time, how well their organisations perform in the face of intense pressure, stress, amidst a financial crisis and a total chaos.

For sure, the level of uncertainty in the startup ecosystem has increased. Meanwhile, the pandemic has fiercely introduced volatile variables – never-seen-before in the business environment.

Still, looking the bright side, the pandemic is classic case-study for anyone looking to build a crisis-proof business. Granted, it is not impossible for founders to predict the future. But what they can do is prepare their organisations for any crisis. The earlier – the better. Eric Kish, CEO of Nanoramic Laboratories, an R&D startup based in Boston, Massachusetts puts this clearly “You cannot predict the future, let alone control it. The only thing under your control is building adaptive capacity in your organisation.”

According to Eric, his organisation was undergoing a full-blown crisis mode 10 days before the lockdown in the city. Once it became clear that the pandemic hit the country, an extensive communication protocol was created to keep all stakeholders informed.

Next, they took steps to protect their employees. Working from home became encouraged. Then, they limited the number of people in the office to only 4 persons at any given time.

To prevent running out of cash, they quickly moved to cut nonessential expenses. Non-critical workers were furloughed. Quite a few efforts were made to speed up the collection of payments on existing contracts.

As he mentions, “This combination of quick action and shareholder/customer support provided us almost immediately with an additional 3 months of cash runway”.

Startups are forced to innovate

Startups, by their nature, are nimble, agile, and dynamic.

These attributes mean they can quickly adapt to changing circumstances. And innovate new solutions to meet raising needs in a heartbeat.

The pandemic has truly tested these capabilities, with startups pivoting their initial offerings to create solutions that meet urgent and essential needs but also collaborate with other companies to boost productivity.

Back in April, with medical supplies and personal protective gear in short supply, a group of 50 London tailors came together to form what they termed the South London Scrubbers. They swapped traditional costumes and suit making to producing uniforms, masks, and kit bags for local hospitals.

Ian Costello, 53, speaking to Reuters UK, said, he now produces medical clothing for healthcare works since the lockdown. “The country is in crisis, and people need to help out,” he said. “People are banding together and trying to do something. It is a feel-good factor for everyone.”

This kind of pivot by startups is seen happening across countries as companies step up to help.

Cheetah, a San Francisco based wholesale delivery service quickly pivoted from supplying ingredients and supplies to restaurants and small businesses in the Bay Area to offer direct-to-consumer service in the wake of the lockdown. The startup, which had launched its business in 2015 saw its business decrease by more than 80% as their B2B clients close shop due to the lockdown order.

In an interview with Jill Griffin, Forbes, Cheetah founder, Na’ama Moran explained how the new model works. “We recently opened our platform to customers to order wholesale groceries on the app just like a restaurant would” she said. “To get the product to customers, we had to create a new model that didn’t exist before now, which we called the ‘Grocery truck'”. He continues that by the time a customer would place an order, they would simply drive about 5-10 minutes to one of their several pickup locations – present their app through the window, open up their truck, and put in their grocery – basically offering a contactless process. The startup recently raised $36 million in a Series B funding bringing the total amount raised since launch to more than $66 million. All happening during the pandemic confinement.

Funding crunch

Even before the pandemic, startups found it increasingly challenging to raise needed capital.

First off, there are many more startups going after the same limited funding opportunities. Secondly, investors’ stringent requirements mean it is becoming harder to meet. Second, the crisis has brought the global economy to a halt. Most Venture Capitals and investors are taking their time to make investment decisions. This has, no doubt, exacerbated an already tight startup funding space.

A recent report from Crunchbase showed venture funding for North American based startups was down by 10% . From $70 billion worth of deals this time last year to $67 billion recorded this year. Experts expect the same trend in other regions as investors hold back on making deals until this crisis blows over.

The implication for startups is that most of them may not have a long runway to keep operations going, while investors are in fact losing several great opportunities.

According to the findings of The Entrepreneur’s survey, with 8400 startups taking part, 42% of the startup respondents mentioned they have less than 3 months’ funding to continue business operations.

As it is always the case, an opportunity not ceased is an opportunity lost. Every challenge brings within a serious opportunity for growth. Both for the startups and investors. Still, Startups providing solutions to real problems are receiving tons of money. While, there are still some investors out there that think strategically and keep the entire pie to themselves. With so many people seeking to build their own product lines, there would certainly be some that worth their time and investment.

As Barbara Thau, Senior Features Editor for US chambers of commerce website noted, “Investors are actually throwing money at startups whose business models cater to a nation on pause, like social-gaming platforms, at-home fitness tech firms, and good-for-you-billed food brands.”

Food startups with a wellness edge are seeing a surge in funding. “Perfect Day, the food tech company that uses fermentation to make animal-free dairy products like ice cream, secured $213 million in disclosed funding.”

Fitness-tech startups that deliver digital workout sessions online are attracting investors attention as well. Hinge Health, the digital physical therapy startup raises $90 million in a Series C back in February. The digital health startup helps relieve patients with chronic back and joint pains.

In March, CureFit, a health and wellness tech startup recently raised $110 million in a Series D.

A takeaway from the trend is that, despite the pandemic and investor cautiousness, startups with real solutions to human needs will receive the funding. The ones that operate a model well suited for the new normal are currently winning the funding game. Social Innovation Enterprises will also prove to be a winning bet. Initiatives that focus to enhance socially responsible practices to the global community will be the new winners.

Why? COVID is surely an international crisis that has brought with it a series of inequalities: gender, children, education, food, cyberspace, defense, security, and digital, among others. Businesses that bring an added value to the wider public in times of crisis deserve and should be funded. Just making money over the same and the same ventures that will win short-term, but lose big-time long-term is not worth anyone’s loss of time, capital, or investment.

Conclusion

Startups are without doubt critical players in the fight against COVID, despite the shrinking funding opportunities. An increasingly untenable business environment means that these organisations are hard-pressed.

While the startup ecosystem is impacted by the pandemic, like every other industry, the crisis has also galvanised the startup community to step up with innovative solutions to help tackle the fallout of the outbreak and for sure engage investment rounds on social innovation enterprises that will use the pandemic as a way to cure a problem. COVID has been a challenge for some time, but we cannot let it debilitate our future forever. After all, we are as good as the solutions that we bring. Startups have shown time and time again that they persevere; defy all odds and move things forward from the ground up. Why not trust trusting them now?