#Stayhome and build a startup

9 minutes
Isolation, the current economic conditions and limited investor spending do not make life in times of pandemia any easier for the startups. However, even under these circumstances there are opportunities and possibilities that make this a potentially good moment to start a new business.

A report published at the beginning of April by PFR Ventures, a fund of funds manager investing in VC funds, in the first quarter of 2020, VC funds have invested in the Polish market 190 million PLN (close to 42 million EUR calculated by the current exchange rate). That’s twice as much as in the first quarter of the previous year. The future seemed bright, until the middle of March.

For the last few weeks entrepreneurs have been verifying their plans. That includes startups and VC investors around the world. @Startup Genome estimates that Chinese VC deals have contracted between 50 and 57 percentage points since the onset of the crisis in the first two
months of the year, relative to the rest of the world
(that refers to Series A and later rounds).

It doesn’t really look like the best possible moment to be building a new business. But perhaps opportunities are more available than it may seem at first sight?

Crisis doesn’t mean failure

Macroeconomic indicators are important, but not key. Over 50 tech unicorns, collectively valued at $145.2 billion, were founded during the recession years following the crisis of 2007, @VentureBeat reports. That includes Airbnb – its founders got the idea to rent their own living space to guests when looking for additional sources of income to pay rent.

The market is signalling that the funds will not cease to invest, but will distribute money differently: more to aid their current portfolio companies, less for new investments. They will also be more selective. Startups (leaving out the companies offering products that are currently in high demand) will have to prepare for discounted valuations and a prolonged search for financing. There’s a chance, however, that seed-stage investments will suffer less than more mature businesses. According to Crunchbase, as a result of the crisis of 2007-2008 the seed-stage rounds were the least impacted of all the early-stage rounds. One of the possible explanations is that it was a period of quick advancements in cloud and mobile technology, which made the launch of the company cheaper and created a wave of new business opportunities. The current situation is in a way similar – our life has suddenly pivoted to online, including in areas that have been resisting that. That brings about new possibilities, and crisis often sparks creativity, prompting the search for innovative solutions.

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The seed money is available, because funds have a long-term perspective. Investors are hoping to see a number of interesting products emerge in the upcoming months, while the market will be getting back to its “normal” shape in the meantime.

After the recession of 2007-2008, global VC investments took one year to recover to pre-contraction levels. The recovery period this time may be similar. How to make the most of it?

Hard times, new opportunities

Businesses offering solutions that are a direct response to the most urgent market demand have to act promptly. Others have a chance to ponder over their ideas and build a product that will be a perfect response to the needs of the society coming out of the quarantine. Precious time can now be utilised for research and the development of a “recession–proof” product. The prolonged period of uncertainty, together with variable market conditions, may make drawing long-term predictions challenging. This will probably bring up the value of support from experienced partners and mentors that have gone through both success and failure before.

Every expert has a different scenario for the future, and the only thing those have in common is that the post-pandemic world will be completely different. A lot of companies will be pressured into changing their business models or their product and services offering. Not all will handle it successfully enough.

There will be a demand for a whole range of new products. What kind? Which of the current trends (such as the uplift in the groceries sales, increased spending on home entertainment and gaming) will transform consumer behaviour long-term? It’s too early to conclude what the future will look like but perhaps it isn’t too early to think if and how it can be… designed.

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Boston Consulting Group notice that the market pioneers will not just accommodate the changing needs of the market, but will also look to proactively influence their formation by means of innovating, educational and promotional activities. BCG also suggests to look for inspiration to China (as the country which most probably will be among the first to find the way in the new reality) and watch “mavericks”, i.e. smaller market players that may react to the needs of this new world quicker and with more agility than the bigger corporations.

Spare expert capacity

Already we can see that some businesses have difficulties managing the crisis. It doesn’t go unnoticed neither by clients, nor the employees – many may be prompted to change the course of their careers as a result. They will be leaving their workplace with interesting know-how, ideas for how to optimise business activities and eager to develop their own products.

Further redundancies are unavoidable. According to the data published by Krajowa Izba Gospodarcza (the Polish Chamber of Commerce), between 320 and 480 thousand of employees may lose their source of income – and that’s the optimistic scenario. Polish Economy Institute in turn indicates that further layoffs are being planned by 28% of the entrepreneurs, while 46% is considering pay reductions. That in turn will result in experts whose skills are needed when building a product being more available.

Support needed? How about venture building?

Eager founders with less experience in building product teams may want to look for a venture building partner. Popular in the Western Europe and the USA, in Poland this model of cooperation is only starting to gain traction. Aside from financing, founders get the support of managers as well as the whole teams of developers, marketing and PR professionals, HR and administrative support. That lowers the risk related to, among others, failed recruitment processes, and allows for a fast-forward development of the project. Example? GRID eSports, a company specialising in acquiring esport data, has been equipped by Tar Heel Capital Pathfinder with a multidisciplinary team of a dozen experienced professionals, including IT developers, which resulted in advancing the commercialization of their product 15 months earlier than it would have been possible otherwise.

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The funds involved in a venture building process may also be more eager to invest in future financing rounds: after all, they know the product and know its owners can be trusted.

New world, new game

Potential founders have thus found themselves facing a number of risks and uncertainties, but with a number of possibilities ahead. Over the course of just a few weeks the world has transformed into its version 2.0. The rules for this game are yet unclear, but one thing is certain: there is no coming back. Sooner or later everyone will be forced to find their way around this new reality, in many cases by forging new paths. Everything seems to be pointing to the fact that the situation is not impossible and the risks come together with chances for success.

The article was originally published in Polish on MamStartup.pl.