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  • Writer's pictureBackBone Ventures

Navigating Uncertainty: How Start-ups Respond to COVID-19

Crisis brings risk and opportunity. How are start-ups dealing with the challenge, and will the pandemic impact trends and cause structural changes? We asked our portfolio companies to share their thoughts and strategies.

It’s tough to be an entrepreneur, and it’s really tough to be an entrepreneur during a recession. The numbers speak for themselves: Only 20–30 percent of seed-stage companies make it to series A — and that’s in a bull market.

Failure is a feature in the start-up world, and an economic crisis usually doesn’t make business any easier. To capture a realistic picture of how start-ups respond to COVID-19, we have surveyed our portfolio companies on how they cope with the crisis. The overall picture is encouraging: 88% of survey respondents said they felt only minor impacts due to the crisis; 77 % have already adjusted their strategies.

Strategic shift to digital marketing

The impact of the pandemic is different for early- and late-stage start-ups. Hardest hit are those that have just launched their products but not yet reached enough scale to be profitable. Many of those have already spent their initial budgets on product development, venture building, and growing their teams but now struggle to scale their sales due to lack of demand and longer sales cycles.

Some of our portfolio companies have reacted by switching their sales focus to sectors that have been less affected by the crisis, for example health care or technology. Most our start-ups are now investing more in digital marketing channels and are narrowing their customer targeting to reduce their customer acquisition costs.

Another way to increase sales is to build products and services that correspond to the changing customer needs — companies could offer contactless delivery services or launch their products on digital platforms.

The impact of the crisis also differs depending on the industry. While digital technology start-ups seem to benefit from social distancing, asset-heavy start-ups or firms in more vulnerable industries — such as advertising or hospitality — face greater challenges.

Seeking funding alternatives in a well-capitalized ecosystem

Most start-ups expect future funding rounds to be more challenging and take more time. That’s a valid concern, even if several high-profile start-ups have recently made headlines after closing funding rounds.

But those success stories don’t communicate a realistic picture, because VC investment activity is a lagging indicator — many deals were already in the works long before the crisis. Thus, although VC activity in March and April was not significantly lower than usual, experiences from past recessions suggest that it will slow-down in the months ahead.

To compensate for the lack of VC options, start-ups react in two ways: First, they cut their spending to reduce their cash-burn rate, so they have more time to find investors. Second, they are looking for additional funding sources. Especially European start-ups can apply for government support on both the national and EU level. A set of institutions and programs provide liquidity for healthy businesses with solid growth prospects.

Digitalization provides growth opportunities

A key trend in the COVID-19 pandemic is a shift to digital products and services, which provides opportunities in particular for technology start-ups. Among our portfolio firms, increasing demand for digital products and services is seen as a major opportunity.

Start-ups also welcome the work-from-home trend, as it allows them to hire nationally and internationally, instead of being limited to the company’s local surroundings. The question is, however, if these trends are only a temporary phenomenon or a lasting structural change.

It’s probably a bit of both, and the next months will show which businesses can capitalize on new opportunities while managing the crisis risks. But if one key message has come out of our survey, it’s this: Digital adoption is accelerating, the ecosystem is well-capitalized, and start-ups are adjusting their strategies and are well-aware of the risks and opportunities. Depending on how the pandemic will pan out over the coming weeks and months, today might actually be a great time to launch or scale a start-up.

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