In the time of Covid-19, not all startups were created equal. We have seen some startup founders going through some of their worst nightmares, while some others are having the time of their lives. In this article, based on our experience, we want to examine the impact of Covid-19 to the startup community and paint pictures of how these startups are reacting to the situation.
One way to assess the impact of COVID-19 to startups is through examining the pandemic’s effect on short term liquidity of startups, and the long term profitability (which correlates with the market size of that particular startup’s playing field). This model is adapted from Roland Berger’s Covid Impact Matrix. We then try to map the technology industry by sector into four startup groups: Shining star, Trapped Tiger, Slow Sore, and Panicking Patient, with a definition of long-term as five years.
Shining Star: This group is marked by its strong growth potential in both the short term and long term. Startups in this space are characterized by the ability to create and capture value completely online and ease and/or urgency of adoption. Covid-19 has driven real demand for solutions in this space, accelerated adoption, and trained consumers to be accustomed to using these virtual solutions. The startups that are included in this group are Healthtech, eCommerce, Online Enterprise Productivity Tools (such as ERP and Software-as-a-Service, or SaaS which can cover anything from accounting, CRM, to property management) Online Media & Entertainment, Insurtech, and e-Payment. Unlike other groups, they have the luxury to focus on perfecting, not fixing, their businesses, and riding the wave during the time of Covid-19.
Boost marketing spend to acquire new users: Responding to the growing demand pie in these industries, many startups were seen to have increased marketing spending to obtain new users. We have witnessed different eCommerce giving out very attractive first-time user incentives. This move is endorsed by many researchers suggesting that increasing marketing spend – instead of decreasing, is a dominant strategy in times of economic uncertainty, if the company can afford it.
Invest to develop new offerings: As lockdown forces the mass from Gen Alpha to Baby Boomers to migrate to online platforms (many wouldn’t have migrated otherwise), several Shining Stars have spotted new business opportunities or new potential use cases for their products that they can capitalize or build loyalty upon. For these startups, they have the privilege to innovate on new offerings without having to worry so much about cash flow. Houseparty, a much loved social networking app that enables group video chatting, for instance, launched a new feature that allows friends to ‘co-watch live events with their friends’ (from sport events to comedy shows).
Integrate new payment mediums to support digital payment of the non-cardholder: Online payments have traditionally been done through credit card, and a good portion of the now digitally adapted population has no access to them. According to the Thailand payment research by JP Morgan in 2019, Thailand’s credit card per capita is as low as 0.29, and debit card per capita is 0.77. As the Thai population migrated online, startups who have the time and resources are now exploring ways to integrate new online payment methods to facilitate payment from non-credit cardholders (usually students and non-urban population). The alternative payment channel includes payment through mobile operators (credited to monthly billing), cash cards, integration with mobile banking apps, and e-wallets.
Although the Shining Stars are thriving in this new market condition, many have reported difficulties in fundraising. This is because Covid-19 has made networking with investors difficult and many investors are very preoccupied with supporting their own portfolio companies.
Trapped Tiger: This group is poised to ride the wave of the longer-term market growth but currently trapped by short-term illiquidity and/or temporary sales slump. This is because the startups in this space offer complementary value products or services whose values are created offline (such as mobility or B2B logistics), or the demand for their products or services is highly elastic (such as wealthtech). Their main agenda is to outlive the Covid pandemic and prepare themselves for the upcoming bullish market.
Freeze or reduce expenses: As revenue halts, their net burn rate accelerates. Founders are faced with a tough trade-off between how far they want to cut costs (or resources) to keep burn rate under control, and how much resources to preserve so that they can get back on track once the market recovers. We usually witness headcount freeze, pay cut measures (many founders take steeper cuts than their team to keep morale high), reduction of employee benefits, and decrease in marketing spending. Many have moved from aggressive marketing spending (to acquire customers – which is what the Shining Stars are focusing) to defensive marketing spending (to just make their offering stay relevant in the customer’s head).
Finetune existing offerings and prepare for the next big launch: If their cash position allows it, some Trapped Tigers reported that they are optimizing their platforms, developing new features, or redesigning the user experience to be more on point. Many also have plans to formally launch an upgraded version of their offerings to create a strong rebound momentum for their business once the crisis is over.
Explore creative use cases for excess supply/capability: Many startups are also working creatively to capitalize on their excess supply resulting from diminished demand. Zoomcar, a self-driving car rental platform, for instance, has been working to shift the excess car in their system for B2B, medical emergency, and last-mile logistic use.
Slow Sore: The Slow Sores are usually B2B enterprise solutions that have locked down short to medium-term SaaS contracts with large corporates. This is why these companies will likely be able to sustain cash flow in the near future. The solution generally comes in the form of back-end efficiency enabler, data infrastructure, and management tools (such as Enterprise IT and Construction-tech). Nevertheless, to onboard these solutions, the corporates would normally have to go through lengthy configuration and system migration, where the startups would then charge ample implementation fees. We can expect that the Slow Sorer will have a hard time making new sales as corporations will try to preserve cash, diminishing sales potential and profitability in the longer run.
Retain and assist existing clients: Startups are devoting time to retain its original customers through feedback-based product improvements. Startups with longer runways also have considered deferring payment schedules to give breathing room for their clients to sort things out first. Amazon Web Service (AWS) has been running a program to give cloud credits or fee deferrals to small companies who are affected by Covid, helping them to continue operation and delay potential job slash.
Reprioritize company’s efforts: Companies are also re-prioritizing their potential clients based on which clients will thrive under the new normal, and shift sales and innovation effort to better suit those growing clients. Many construction-techs are turning their attention to the B2G construction segment, which was once overlooked due to its bureaucratic and traditional approach to business. The reason is that, with the private sector’s growth outlook remaining stagnant, government spending on infrastructure will likely be the only prominent source of industry growth.
Focus on streamlining the onboarding process: Noticing that troublesome and expensive onboarding process is among the key barriers to adoption, many startups are now trying to pursue growth by making the onboard easier and cheaper for their clients. This could mean offering a more standardized solution, a self-guided onboarding wizard, and elimination of implementation fees to target small and medium enterprises.
Panicking Patient: The Panicking Patient group is affected by Covid-19 in every worst way. These startups are behind the industries that are heavily involved with offline activities (such as Traveltech and Eventtech). The light at the end of the tunnel (that comes in the form of Covid-19 vaccines, treatment, or virus mutation to a much weaker strain) for this group still seems far away at the time of writing this article (many expects that the pandemic wouldn’t get resolved for at least another 2 – 3 quarters). These companies are in a big battle for their survival and need to pivot or at least diversify fast.
Extend the company’s cash runway: Like the Trapped Tigers, we have witnessed several expense reduction efforts by the Panicking Patient. Companies are returning office space and adopting the 100% WFH model. Steep pay cuts accompanied by reduced workdays and staff reduction are becoming prevalent. Indonesia-based Traveloka laid off 10% of its employee in April, while Bangkok-based Agoda slashed up to 25% of its workforce in May. Many are also borrowing cash from future revenue by offering prepaid vouchers or unlimited future passes. This example is also evident in the traditional travel industry, in which airlines and spas are selling heavily discounted vouchers to get cash for the survival of their businesses.
Pivot to other businesses: Because it is unclear when the situation will be back to normal, some startups choose to pivot to related business(es). Eventpop or Airbnb, for instance, chose to pivot to the online experience space, offering exclusive online events to its customers from dough making lessons to online meditation events. Some startups went to a more extreme route and completely shifted their businesses. Flying Elephant Production, an Irish startup focusing on exhibition and event setups, pivoting to selling desks made from the excess plywood they have in inventory.
In this difficult time, we hope this piece will spark some food for thought for you and your organization, no matter what roles you play in the ecosystem – founders, investors, corporate partners, or a mere observer. The pandemic forces us into the lifestyle and working mode that we thought would never be possible. Similar to us seeing new joys in the new normal, businesses and startups will see new rooms to thrive. Like what the US President John F. Kennedy once put, “when written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.”
Author: Woraphot Kingkawkantong (Ping)
Editors: Wanwares Boonkong, Vitavin Ittipanuvat
Covid Impact Framework: Roland Berger
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