It’s been surprisingly difficult to pigeonhole the effects of COVID-19 on startups. I’ve reached out to many startups to see how they’re doing in the current market. And much to my surprise, many founders have told me that COVID-19 is a “net positive” for their companies. None have said that it’s done more harm than good. And none have even hinted that it will drive their young companies out of business.
That’s great news. I’m just not sure if I should accept it at face value. COVID-19 sparked an economic recession. Several industries are still floundering — particularly travel, hospitality and entertainment. Capital flows are constrained. And banks are more cautious about lending money.
But I’ve talked to dozens of founders of early-stage startups over the past couple of months. And a majority of them have found unexpected ways to forge ahead and even accelerate progress.
Startups aren’t necessarily as vulnerable as you might think. They have small payrolls. They know how to operate on tight budgets. They can be impervious to supply-chain disruptions because they’re often pre-revenue or software-dependent… All these things make them resilient to economic slowdowns.
But their biggest superpower is their ability to tap into powerful trends. All the founders of direct-to-consumer (D2C) startups that I’ve talked to say business is booming. The typical response has been similar to what I heard from the founder of an innovative wine club company: “We gained over 26,700 new customers in March. It exceeded our new customer acquisition goal for the entire year!”
Things aren’t so rosy for every founder I’ve talked to. Some gave me more mixed feedback. One founder, for example, admitted that their company wasn’t able to fulfil two to three weeks of orders because of supply chain disruptions.
As I continued having conversations, I noticed a pattern. Startups seemed to fall into one of three groups when it came to how they’re faring…
- Startups benefiting directly from pandemic and recessionary conditions. Besides D2C, startups have jumped on other powerful trends. Companies that enable remote workers are a good example. So are companies that make it easier to exercise at home. Then there’s the startups that help doctors and nurses make good decisions in the midst of often chaotic hospitals. A good example of this is a startup we recently recommended to our First Stage Investor members. This startup offers the latest treatment information on COVID-19 (and hundreds of other ailments) through a mobile-friendly app.
- Startups benefitting indirectly from the recession. These startups are a diverse bunch. The founder of a company that grows through acquisitions said COVID-19 and the recession have driven acquisition prices down a good 30%. A drone-enabling company said investors are more interested than ever before in solving last-mile delivery problems. And a company that helps truck drivers find gigs said the recession is driving truck companies out of business, which increases the need for his services. The pandemic has helped a multitude of startups like these in unexpected ways.
- Startups hurt by the pandemic or recession. I’ve also spoken to plenty of these founders. Most come from the brick-and-mortar retail and restaurant worlds. But not all of them. A founder of a company that brings more transparency into the global recyclable materials market said there’s been a drop in demand because buyers and sellers aren’t able to close deals person-to-person.
Companies in certain industries are hurting right now. And startups in those industries are no exception. But the real takeaway from my conversations is how many startups aren’t just surviving. They’re accelerating their growth. The best startups are incredibly nimble. They see emerging issues, so they repurpose technology and existing products in response. And more importantly, COVID-19 has brought into sharper relief many of the problems that startups were already addressing.
The demand these startups were projecting for their products has shifted from the future to the present. Instead of hoping for demand to materialize, they’re seeing it in real time. The path forward for these companies is suddenly clear. And the risks are much lower.
They also make the most compelling investing opportunities for early-stage investors.