The adverse challenges created by covid-19, including operational disruptions, demand uncertainty, prolonged work-from-home (WFH) and a hit in fundraising, among others, have impacted startups in particular. Only the fittest will survive. Bain and Co. sees three critical priorities for startups as they navigate uncharted waters in the post-covid world.
One, startups in covid-hit sectors need to increase their runway and prepare for an 18-24-month recovery. This involves redefining the company’s cost structure completely and re-imagining what is ‘essential’, not just a provisional trim. Temporary salary cuts may be a start, but are not a long-term solution—instead, companies need a harder look at organization productivity, do away with rental costs forever, set new benchmarks for marketing efficiency and ‘variable-ize’ cost, as much as possible. Shoring up capital is a priority for companies with a short (9-12 months) runway, no matter if it comes from internal rounds or at highly dilutive valuations. New forms of capital, such as revenue-based financing, are worth exploring, too. While there is dry powder in the system, there is also greater uncertainty and apprehensions around impacted business models.
In the first half of 2020, deals larger than $100 million have been most impacted, both in terms of volume and average deal value. Consumer-tech, IT and ITES, and BFSI sectors recei-ved the most investments, with healthcare emerging as the fastest-growing segment.
On the other hand, startups in sectors positively impacted by covid, and with healthy balance sheets, should expand capabilities and gun for scale. ‘Building’, ‘buying’ and ‘partnering’ are all viable options, and with several distressed assets, this could be a good time to acquire or partner at affordable valuations.
Two, this is the right time to rethink the business model. Consumer behaviours are changing fast and some chan-ges will be permanent. Startups are best placed to liberate their business models from the shackles of past beliefs and invest speedily into their best assessment of the future.
Online gaming, entertainment and e-commerce were the initial sectors to feel the surge, with ed-tech not far behind. But even in sectors where traditional business models have been badly hit, say, those with extensive offline components, startups have the opportunity to reinvent customer journeys and engagement in new, tech-enabled ways. Companies need to rethink business models in light of what is needed, not what they are good at. For example, an ed-tech startup with best-in-class field sales needs to build digital marketing and online sales to drive customer acquisition.
Three, the uncertain environment and the need for cost efficiencies can create challenges for the organization. Startups need to ring-fence key talent, identify ‘high-potentials’ and work extra hard to retain them. For instance, companies can consider issuing ESOPs at lower strike prices or with a 1-year vesting period. WFH comes with its own set of challenges and, while it kills many cost items on the P&L, there is a risk of unengaged employees. A good test is to see if companies have a dedicated chief engagement officer in place to ensure employee connectedness, and if the leadership meets the frontline twice as frequently as pre-covid levels. Startups must invest in talent engagement and, if needed, over-communicate to ensure clarity of mission and shared priorities, and embrace a two-way dialogue with employees.
There’s no silver bullet to surviving this economic and humanitarian crisis. Recovery will depend on startups’ ability to adapt and reinvent their business models, and keep their organization resilient to the turmoil of the times.
Joydeep Bhattacharya and Navneet Chahal are Partners at Bain & Company. They are leaders in the firm’s Consumer Products and Retail practices.