A major investment firm has said that startups should prepare to consider cutting workforce and marketing budgets
Major investment firm has said that startups should prepare to consider cutting workforce and marketing budgets, and to get by without more capital investment.
In the world of venture-backed startups, cash burn rates, revenue forecasts and growth projections usually dominate.
But the realization that the COVID-19 pandemic could have dire economic consequences has founders focusing on survival.
Andrew Wells, founder of Pinch Financial, an online platform for automating the mortgage-qualification process, said he’s trying to figure out how to get through the next 12 months.
Typically startups try to plan a runway of six to eight months between (investment) rounds for revenue projections and stuff like that, Wells told the Financial Post. We’ve been very clear in our team that we need a runway of 12 months.
While Wells and all the others who spoke to the Financial Post said first priority is following public health guidance and the safety of his staff, he also doesn’t want to leave his company’s future up to chance.
Whether the COVID-19 pandemic is good or bad for real estate, I don’t want to place any chips on that at all, he said, focusing instead on controlling costs wherever he can.
Abdullah Snobar, executive director of the Ryerson DMZ startup incubator, said he’s already seeing fallout from the COVID19 pandemic.
Some will come out of this. Some will not, Snobar said.
We’ve already have some companies that applied to the DMZ that were in the lifestyle food-tech space, and they have already said you know what, we need to rethink our timing of when we launch because we just don’t think we can survive this recession, he said.
Last week, influential Silicon Valley venture capital firm Sequoia Capital published a note to companies with advice on how to manage through COVID19.
Some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider, Sequoia wrote in a post published on Medium.
The investment firm suggested that companies should be prepared to consider cutting workforce and marketing budgets, and that it might be necessary to get by without further capital investment.
Private financings could soften significantly, as happened in 2001 and 2009. What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? the Sequoia post said “Could you turn a challenging situation into an opportunity to set yourself up for enduring success? Many of the most iconic companies were forged and shaped during difficult times.”
How the virus and the economic tumult will impact startups is likely to depend on what sector they’re in, and in many cases, it’s impossible to know until events start unfolding.
Wells said the current climate could be good for Pinch, because interest rates on mortgages are low, but it could be bad because people will put off major financial decisions like buying a house.
Snobar said startups doing event planning services are clearly going to suffer, as large gatherings are curtailed, but other kinds of businesses will thrive.
Yvan Boisjoli, chief executive of Winnipeg-based Bold Commerce, said the virus and even an economic downturn could actually be good for e-commerce companies, such as Ottawa-based Shopify Inc.
E-commerce has never been through a recession. The closest thing would be 2008 and back then, you know, I think Shopify would make a claim that it actually helped their business at that point, Boisjoli said.
There were a lot of layoffs, and people went to e-commerce and started building a store as a way to try and make some money, Boisjoli said.
Boisjoli said every economic downturn disproportionately affects some businesses, but that few are spared altogether. Really, a recession will affect every business. It’s just, which ones will be affected more than others.
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