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5 ways life is getting harder for startups in 2020

Early-stage companies, in tech or otherwise, are facing a unique mesh of challenges this year.

woman wearing mask with back turned to coworkers
  • With VC funding dropping, 41 percent of startups are now in the "red zone," with under three months of working capital remaining.
  • Service sectors that require in-person interactions have been hammered, and the gig economy is being litigated into oblivion.
  • Even with the best of tools and platforms, remote work can have its drawbacks, from virtual collaboration learning curves to cybersecurity vulnerabilities.

Between the economy, the civil unrest, and the pandemic, 2020 has been a difficult year so far to say the least. And it's still only June. The mind boggles when one thinks about what could still be in store for us.

While 2020 has been tough for everyone, each sector of society and the business ecosystem has its own set of circumstances to contend with.

What's happening with startups, specifically? While people often think of startups as all being venture-funded tech companies, this is hardly the case. Basically any small business that's yet to be profitable technically qualifies, and in this sense, the startup community is a microcosm for the economy as a whole. Indeed, over the past ten years, according to Statista, startups in the United States have created between 2.5 and 3.1 million jobs per year.

Let's take a look at the unique mesh of challenges that have made life extraordinarily difficult for startups in recent months.

1. Startup funding is harder to find.

With COVID-19 upending stock markets around the world, it's understandable that 46 percent of VCs are shifting their focus to their existing portfolios, much to the chagrin of startup founders.

Many VC funds have less capital available because their assets are tied up in the plummeting stock exchange. The Dow Jones reported its largest-ever single day fall of almost 3,000 points on March 16, 2020, and the NASDAQ lost over 1,300 points in the past months. With their eyes on the markets, investors are reluctant to tie up capital in early-stage startups, which are seen as risky gambles.

At the other end of the life cycle, valuations have dropped significantly, leaving founders looking at lower payouts when they do manage to negotiate successful exits. As Andris Berzins, partner at Change Ventures, pointed out, "In the previous crisis valuations went down by 30% on average. We expect the same if not lower."

With VC funding dropping, 41 percent of startups are now in the "red zone," Startup Genome reports, with under three months of working capital remaining.

2. VCs are more rigorous about due diligence.

Investors who are still willing to fund new ventures are ramping up their focus on due diligence. They have more time to spend on the process, they're facing increased pressure not to make mistakes, and they need to compensate for video pitches that prevent them from building trust through face-to-face meetings.

Today's VCs are demanding to see more reports, and want due diligence documents to be better organized and easier to consume. Startups can expect increased scrutiny of their projections, cash runways, burn rates, and demand for reports on the impact that coronavirus has been having on their current sales and future plans.

ContractZen's virtual data room solution is emerging as one of the go-to ways founders are meeting these new demands and impressing investors. Essentially a corporate document vault reinvented for the digital age, it enables you to share files at need while still keeping every item securely protected from malicious actors. With this solution, tags and metadata search help you to swiftly gather the right reports and documents from relevant periods and collect them into an ad hoc, situation-specific virtual data room. Once it's set up, you just need to grant access and then share the link to the VDR to give VCs access to all your due diligence files, speeding up your response time.

The data room "enables companies to keep up with the pace of business by having critical documents readily available at all times," wrote ContractZen CEO Markus Mikola. "When your documents are readily available, it increases the trust between the two parties, smoothing the path of business even more."

3. Markets are shrinking.

All around the world, unemployment is rising, revenue and trade are dropping, and businesses are collapsing, causing markets to shrink in every sector. Data from Q1 2020 shows that global trade values have already dropped by 3 percent.

Best case scenario predictions foresee global GDP shrinking by 4.2 percent, while other opinions estimate economic output falling by 6 percent globally and 7.3 percent in the US. If a second wave of infection hits, that could worsen to a drop of 7.6 percent around the world and 8.5 percent in the U.S.

This economic slowdown has an inevitable impact on demand for every sector as consumers and businesses tighten their belts. Three out of every four startups work in industries severely affected by the COVID-19 crisis, Startup Genome's data indicates. The tourism and travel industries, for example, are in freefall and are unlikely to recover for some time. Service sectors that require in-person interactions have been hammered too, and many manufacturing companies have been affected due to disrupted supply and delivery chains.

However, the healthcare sector is expanding, and the software as a service (SaaS) vertical is also performing reasonably well. And for SaaS companies that need more cash flow, a new service called Pipe provides loans based on the startup's annual run rate (ARR), a commonly used metric that serves as a rolling estimate of revenues over the year ahead.

4. WFH poses new challenges.

While working from home has enabled many startups to increase work output, with 86 percent of remote workers rating their productivity as excellent or good, it's been a difficult transition. Moving back to the office will be challenging as well, and if a second wave hits, we could have to go through it all over again.

Even with the best of tools and platforms, remote work can have its drawbacks. Communication is WFH's weakest link, especially for the many employees who were new to remote working. Collaborating with colleagues from a distance requires a whole new set of skills, and startups struggle to transmit company culture to new hires over Zoom. Sometimes you need a face-to-face conversation in order to iron out misunderstandings, enable effective collaboration and spark creativity.

"Remote work impedes the creative sparks that fly when we are interacting with actual people rather than their thumbnails on Slack," journalist Kevin Roose pointed out.

Remote working also raises cybersecurity issues. You need to give everyone access to data and platforms from their home networks, but without compromising security in the process. The 600 percent increase in reported phishing emails since February 2020 shows that hackers are not slow to take advantage.

5. The gig economy is in crisis.

A whole generation of startups have built their businesses on the gig economy, whether they rely on freelancers to stay lean, serve as a conduit between the established business world and gig workers, or created their business model as "Uber for X." Many of today's leading marketplaces for gigs have built solid reputations among other startups, which depend on them to source temporary, project-based talent, often on the cheap. No wonder freelance marketplace reviews have been generally positive.

But with the whole gig economy rocking on its base, startups and workers are suffering together. One-time startup success stories like Lyft and Airbnb have seen demand implode. Shared workspaces have fallen out of favor. About 26 percent of startups have had to say goodbye to 60 percent or more of their staff, according to Startup Genome.

At the same time, the coronavirus crisis has led legislators to push to extend employee rights to gig workers. In California, officials sued Uber and Lyft for refusing to give employee benefits to their drivers. Gig workers are increasingly talking about unionizing, which would leave businesses to hope that their demands would be merciful.

After all, at a time when startups need to think creatively about survival, they also need to rethink how they protect their workers.

Upheaval in the startup world 

What with shrinking markets and chaos in the gig economy, drops in available VC funding, an increased emphasis on due diligence, and the unique challenges of WFH, startups are going through an unprecedented period of difficulty. With so much that's outside of founders' control, it's vital to implement the right policies.

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