By Monica Mehta
COVID-19 has driven the acceleration of technological adoption in the startup community. As the world adapts to new modes of life, startups that enable consumers to shop, study, work and interact virtually have suddenly skyrocketed to mainstream adoption.
These startups are being driven by key underlying technologies that have gained significance over the past few years and have become essential tools for growth today. Machine learning and artificial intelligence are hands down the most prevalent of these technologies. Cloud computing is critical to the underlying business for many startups, helping support everything from virtual learning to telemedicine, to food delivery. Startup CEOs have put a premium on agility, and their biggest ask of tech is a faster return on investment; in weeks, not years.
The most successful startups in 2020 have been those that built digital strategies into their DNA. These fledgling companies have focused on cloud connectivity, digital marketing to consumers, and virtual interactions, which has given them an advantage over incumbents. Being digital-first also put many disruptive startups in a position to quickly develop and introduce new products or services to meet the challenges of the pandemic and are now in a position to leapfrog their less nimble competitors.
However, one cannot understate the COVID-19-related challenges startups face today, irrespective of their level of digital prowess. Being digital-first in and of itself isn’t a panacea to all the headwinds that businesses face given the pandemic, but they do have more tools at their disposal to weather the storm and to come out stronger on the other side.
Diversity in Talent and Flexible Distribution
The pandemic has challenged the predominant notion that a physical office presence and connectivity are irreplaceable. Several startups are operating sans an official headquarter today without it affecting their performance and growth. In fact, an informal setup, along with flexible distribution has enabled better connectivity with startups taking minimal time in responding to challenges, while decreasing the barriers that an in-person office setup brings. Building a distributed team has enabled many startups to work seamlessly across geographies, which has not only offered them a distinct strategic advantage but is increasingly essential for survival.
COVID-19 has pushed startups to restructure their work culture, and team members are increasingly comfortable with telecommuting, which is here to stay. Remote working has offered startups the flexibility to attract quality talent and leverage the best in the class for their workforce. Remote teams have given employees the space to juggle multiple responsibilities and have thereby led to increased diversity in the workforce and a transformation of startup hiring policies and culture.
Despite the unemployment rate being at an all-time high, several disruptive startups have recruited new employees since the onset of COVID-19 which is, in turn, the result of the surging demand for their core offering since the pandemic unleashed itself across the world. Many of these startups are focussed on health care, financial services, digital marketing, EdTech, cloud connectivity and online distribution to consumers, and they have seen demand for their core products and services more than double during the economic shutdown.
Regional Supply Chains
China’s emergence as the hub of global supply chain is one of the biggest stories of this century. However, China’s global command peaked in 2017, after which the pandemic struck and in turn unleashed a disruption that few had predicted. The onslaught of the virus highlighted country risk at an unprecedented scale given the depth of their dependencies on China. With countries wanting to become increasingly more self-dependent, it has opened up many opportunities for young startup entrepreneurs to ideate and bring forth innovative, disruptive solutions for local and regional supply chain that will strengthen the self-dependence of nations.
Changing Dynamics in Investment Activity and Processes
As a result of the pandemic, the VC industry is being affected globally, where VCs have moved from being laissez-faire VCs to more involved VCs.
Additionally, there is a smaller investment pool and more risk aversion, although with certain nuances depending on the type of investor. There is also a paradigm shift in which VCs are gaining some negotiating power given the smaller investment pool, a power that entrepreneurs did hold until now.
Additionally, travel restrictions have caused cross-border venture capital investment to decline over the past two quarters, given the difficulties in conducting a purely virtual due diligence. In early-stage investments, although ticket sizes are smaller, meeting the founding team or visiting the startups’ facilities is a key driver for decision making. While some transactions are being carried out, the process and timeframe for investment has become lengthy due to the new dynamics.
However, there is still interest in alternative assets, within the digital ecosystem and VCs have the ability to make the most of the increasing adoption curves given the transition from offline to digital models. Also, this new environment may be an opportunity for some VCs to participate in companies which they were unable to do in the past due to oversubscribed rounds.
Adapting to the New Normal
In the post COVID era, startup founders have increasingly started expanding their runway ranges (the number of months a startup can operate until it exhausts its available cash flows). If before it was 12 months, the runway ranges will now be extended to 18–22 months.
Finally, investors have displayed changing priorities with an increased focus on profitability (breakeven period, unit economics, control on burn-rate, etc.). Startups are betting on pivoting their business models, while modifying their product and business roadmaps, albeit with a more cautious approach as they postpone strategic decisions. Overall, in a post COVID era, capital efficiency is more important than unbridled growth, while remuneration via stock options are on the increase given the global drop in salaries.