Observations on the Impact of COVID-19 on the International Startup Scene
Over the last six months, our world has been turned upside down. It’s safe to say that the pandemic has affected our lives at all levels. And, even though we have somehow adapted to the new normal, it’s still a difficult, uncertain, and challenging situation for both our private and business life. Economies around the globe are suffering, many companies need governmental funding, and even large corporates fear insolvency. We asked our Program CEOs to share their thoughts and observations around the impact of COVID-19 on the startup scene worldwide.
Hurdles, Challenges, and Threats
Many companies, not only startups, had to switch to survival mode. Many had to cut costs to extend their runway. While external funding is hard to achieve because many investors ‘circle the wagons’ and focus on supporting the companies already in their portfolio, the availability of investment is certainly one of the major challenges for startups. Another observation is that sales cycles have extended tremendously, especially in the B2B area. Customer conversations and customer acquisition are more difficult to conduct remotely than they would be in person. Listening, pitching and convincing people in online meetings requires new skills that teams have to develop quickly in order to keep up with the current circumstances and close new deals. It’s hard to build relationships and boost sales while many businesses are preparing for a ‘long winter’ – but it certainly is not impossible.
The Biggest Work-From-Home Trial Ever Conceived
The biggest impact COVID-19 had on our business life probably is the level of remote work we have today. We are all part of a massive work-from-home trial. No matter if companies were in favor of or against remote work, no one really had much of a choice. They all had to succumb to ensure social distancing and keep up with local guidelines and safety recommendations by governments. Besides the frequently debated question of whether the work-from-home concept can work in the long term and if staff is actually more or less productive without being constantly observed by supervisors, humans are social creatures and ‘herd animals’.
“We’ve made remote work work, but frankly, nothing beats a face to face conversation both with the team and with customers. It’s crucial to find a healthy balance between remote work and in-person interaction,” summarizes Matthias Notz, CEO and Managing Director of German Accelerator.
Differences by Industry
To which extent startups are affected by the pandemic, also depends on the industry they are active in. While the remote work concept is working properly in the white-collar services, the blue-collar industry has suffered from social distancing, as it simply requires the physical presence of workers in the factories. For any startup offering services or products that require or are related to face-to-face interaction such as event ticketing systems, the virus is a huge challenge. Companies that are active in areas such as events, ticketing, or direct services simply can’t offer their service or product as there is simply no demand. Also, startups in the travel and mobility sectors are suffering from a sharp drop in sales. In the manufacturing sector, the consequences were also more dramatic. Supply chains were or still are interrupted leading to the inability of startups to produce, assemble, store, or ship their physical goods. On the other hand, businesses providing collaboration tools, fitness apps, online shops, or education and cloud services benefit from the crisis.
The Life Sciences Sector – the Winners of the Crisis?
Considering that the whole world is impatiently waiting for a vaccine or a medication against COVID-19, the increased demand for medical supplies, and the number of sanitizer people bought a few months ago, one could jump to the conclusion that the life sciences sector is booming during the crisis. Solutions addressing mental health issues are also expected to benefit from a higher interest after quarantine and isolation. But as with any other situation, there are two sides to the coin. While some life sciences companies actively joined the fight against the virus, not every company in this sector started pivoting and focused on COVID-19. In fact, organizations working on clinical trials are similarly affected as manufacturing businesses: the safety recommendations and lockdown regulations by governments forced important facilities to close down and companies had to pause trials or product development. “Organizations offering digital solutions have done extremely well. With social distancing and a digital transformation, we are witnessing an accelerated adoption of new technologies at an inconceivable speed within the life sciences sector. For example, remote patient monitoring, virtual care, and AI-driven triage tools have become more popular over the last months, and investors and industry insiders remain optimistic these trends will continue,” summarizes Marc Filerman, Program CEO of German Accelerator Life Sciences.
How to Survive the Crisis
Unfortunately, according to a report conducted by the Bundesverband Deutsche Startups on the impact of the corona crisis on the startup ecosystem, 80% of German startups fear for their existence. But how can companies survive or even come out of the crisis stronger than before? “We are coaching startups to tighten the ship to get through the choppy waters, encourage them to talk even more to their clients and ask them what they need. Startups need to be hyper-relevant now to make the best sense of the situation and even come out as a winner,“ says Claus Karthe, Program CEO of German Accelerator Southeast Asia.
During the economic downturn, mission-critical value propositions are going to thrive, while nice-to-have value propositions will die out, so watch the market carefully and focus on customer retention. Another frequently heard advice is to brace for a long winter, cut costs, and only focus on survival. “I would recommend cutting all non-essential costs as quickly and deeply as possible but to do this all at once. If you are going to cut the dog’s tail off, do it once, and not in pieces – you would hurt the dog again and again,“ explains Co-Founder & Managing Director of German Accelerator, Andy Goldstein. But still, startups should also keep on planning for growth, expansion into new markets, and diversification if the individual circumstances allow for it. Any potential should be leveraged, so it’s also the time to be creative and think outside the box. New partners can open up new opportunities, too, so non-traditional collaborations along the supply chain should be taken into consideration.
Furthermore, it’s advisable to start any funding conversations earlier than originally planned as closing new funding rounds will be harder as investors are more hesitant. To sum it up, hear it from Christian Busch, Program CEO of German Accelerator New York: “make sure that everyone in the team carries their weight 100% to keep the business running, plan conservatively from a cash-flow perspective, and don’t stand still but be humble!”
The Advantages of Startups
Short- to mid-term, startups might also have an advantage over large, established corporates. They can act in a more agile way and can adjust to changing customer and market needs more quickly. If startups manage to rapidly adapt to the new normal and then focus on pivoting their solution in order to meet new demands, they can improve their market position. And, besides all the challenges and uncertainties, every crisis is also an opportunity. Our German Accelerator mentor Brandon Atkinson, CEO and Principal Consultant of 46 Summits Consulting, gets to the heart of it: “We need to remember a lot of great tech companies were founded during a time of recession. It’s because everything bad creates an opportunity for something new and good. When there’s disruption, that’s when our DNA as entrepreneurs really kicks in.” So, it’s not all doom and gloom, it is also an opportunity to shine.
Will German Startups Expand Internationally in the Near Future?
For now, no one can really say yet ‘after the pandemic’ as there is no clear timeline when and if at all we will return to business as we used to know it. Therefore, it’s too early to tell how the pandemic will affect the expansion plans of German startups in the long run. From what we observe now, the interest from German startups in U.S. and Asian markets continues unabated and internationalization offers opportunities any young business should leverage to survive the crisis, but the approach has certainly changed. Due to travel restrictions and safety recommendations, it is not possible these days to physically explore new markets and opportunities on-site, but what is possible is to thoroughly plan and prepare for the actual expansion remotely now.
“Active and aggressive expansion, especially in the U.S. market, has been replaced with extended preparation for an expansion when founders and employees can physically return to the U.S.,” explains Andreas Hofmann, Program CEO of German Accelerator Silicon Valley.
During this preparation phase, it is possible to make first customer connections, speak to potential business partners, and leverage the knowledge of mentors and local experts. Startups should use their time and resources more wisely than ever before, even though this might look differently from what one would have expected.
In the long-term startups following this approach will be better prepared for their market entry and international expansion in the future.
An Outlook to the Future
Our world has flattened, the digital transformation has been accelerated, and the online world widely substitutes in-person interaction forcing people to adapt. Envisioning what the future could look like, it’s hard to imagine a fully remote business world without any face-to-face interaction, but we will potentially see more work-from-home setups also in a post-corona world. Some industries could be disrupted completely such as the logistics and healthcare sectors. This will open up opportunities for both existing and new companies.
“Some startups will look back in five years and say ‘the best thing that ever happened to us was the coronavirus.’ Many young companies started pivoting, changed their way of working or adapted their business model. There will be a lot of good things coming out of this pandemic,” says Goldstein.
We Are In This Together
The pandemic has brought people closer together and strengthened the community. We’re all in the same boat and, as mentioned before, the world has become flat. Most people seem to be kinder to each other, more caring. It looks like many of us have been reminded of what is really important in our ever-changing, dynamic, and competitive society. We’ve also become more entrepreneurial in solving everyday issues like sharing food and supplies or going grocery shopping for elderly neighbors. We’ve been forced to take life a little slower. Also in the startup scene, people are supporting each other, trying to help where they can, and joining forces in order to keep up with the current circumstances. It’s safe to say that #WeAreInThisTogether.