Can Your Tech Startup Survive COVID-19? (Early 2020)

Like many small businesses, tech startups have come under severe strain due to the COVID-driven quarantines across the country. So how can founders of vulnerable firms best position themselves to survive this crisis?

Interest in Early-Stage Ventures Cooling Even Before the Pandemic

Tech industry venture capital was already drying up heading into 2020. According to data from CB Insights, Global VC funding declined 16% in Q4 2019 after a 10% decline in Q3. Clearly, many VC firms think an industry-wide culling is on the horizon—especially after COVID-19.

In short, many VC firms don't want to invest good money after bad. According to the Wall Street Journal, even venture-capital darling Air BnB had to reduce its valuation from $31 billion to $18 billion and offer 10% interest to investors to obtain a $1 billion bridge loan from Silver Lake. Securing further capital from equity financing can come at a punitive valuation in the current environment.

Self-Evaluation Needed

Entrepreneurs need to evaluate their overall situation in light of current conditions. Further funding might be an option in the gaming sector, web security field, and firms rolling out social media apps due to the jump in people staying at home. Startups ready to hit the market with a product enjoying an upsurge in use during the pandemic can be a happy exception to the shrinking VC capital market.

For everyone else, startups need to closely monitor their capital burn rate. Cut anything that isn't absolutely necessary to keep your doors open. Fifty tech firms in Silicon Valley have already laid off more than 6,000 workers. Sequoia Capital is calling it "the great unwinding."

Firms with VC deals already in the pipeline might be well-advised to close immediately rather than continue to negotiate. Unfortunately, valuations aren't going to improve in the short term. The other option is to hold off ramping up until the crisis recedes.

The key is to survive until the rebound. China is already enjoying a bounce-back in VC-backed ventures as the pandemic fades. After a 60% decline in the first six weeks of 2020, Chinese firms landed 66 VC deals in the week ending March 28, which is slightly below the number of deals over the same period last year. China's quick recovery gives hope that rapid turnarounds in venture capital availability might happen in other countries.

Government Bail-out

Congress recently passed the $350 billion Paycheck Protection Program to help firms with less than 500 employees meet upcoming payroll obligations as part of its $2 trillion stimulus package to address the economic crisis. Many politicians have insisted that this money is intended for main-street businesses and not tech startups. However, nothing in the legislation indicates that tech firms can't apply for federal support.

Tech workers are consumers just like everyone else. So whether the jobs are in Silicon Valley or a Mom-and-Pop store, workers suddenly deprived of a paycheck will struggle to remain afloat.

In the end, each firm will have to balance the potential of negative backlash for taking such money against the risk of failure. In the B2B space, startups might be less concerned about their public image than firms whose products directly serve consumers. However, public backlash is a genuine danger that could harm a company's brand identity for years to come, regardless of sector.

Seize the Day

Like any massive market shift, the COVID-19 crisis will create opportunities. Tech firms will need to carefully monitor emerging changes in consumer behavior to take full advantage of the coming rebound.