Startups and scaleups worldwide are facing a make-or-break moment with coronavirus, a health crisis with vast and unprecedented economic consequences. Each entrepreneur is in a unique situation, whether they’re well-funded, planning their next funding round or struggling through the uncertainty.
As a result, founders are turning to their VCs and mentors for support and conversations are, unsurprisingly, centred around cash. In the UK, while £81m has gone to startups that haven’t received investment previously, there’s been a 31 percent decrease in deal numbers compared to the same period last year—so it’s a pressing issue.
But cash alone only presents half the story. As startups seek advice on how to weather the storm and find positives in the situation, the conversation broadens. To survive this period of instability, growing businesses should look toward the key cornerstones of success: talent and leadership. After all, the best founders never waste a crisis and now is a good time for them to refocus.
The vision could be great, the founders innovative and cash readily available, but without strong leadership and world-class talent, businesses can’t continue to thrive in this climate. How to look after and manage teams during this time, as well as understanding what staff cuts to make and how, are important considerations that startups are looking to VCs for support and advice on.
A conservative approach.
Any business plans that organizations had in place ahead of the pandemic are now likely to be irrelevant. Businesses need to start from scratch with a clear view of their burn rate and shouldn’t be afraid to rip up the rule book and abandon existing plans. Startups already doing this have looked to renegotiate their office rents, contracts with providers and suspended online advertising, for example.
Reducing such costs is sensible in a challenging fundraising environment. Deals have slowed down and the Pitchbook European VC Valuation Report points toward a decrease in early seed rounds. New investments certainly have stopped and great companies always get funding, but many investors are focusing on how to support their existing portfolio. The crisis isn’t over yet and, with further outbreaks still possible, now is the time to be conservative.
Again, however, never waste a crisis. Take this time to streamline your focus, understand strengths, evaluate your position, and abandon non-essential projects. This crisis could be a good opportunity to make those pivots and big changes you always knew you needed to make, but didn’t due to a lack of bravery or time. Let’s not forget, a conservative approach through a crisis doesn’t mean standing still.
Strong leadership during a crisis.
Communication and leadership are fundamental skills that should run alongside a revised business plan. It’s likely that startups will face difficult decisions during this time, which could include laying off staff, scaling back the business, or even pivoting offerings to respond to the crisis. Above all, it’s critical that employees are kept informed of the latest developments and how they will impact their work.
During my time leading the team at Huddle through the economic crash of 2007 to 2009, we made the difficult decision to make some drastic team cuts, including senior staff, to make ends meet. To navigate through this crisis and ensure productivity was front of mind, we focused on bringing the remaining team together, being totally transparent, keeping busy and focusing on what had to be done. In the long-run, this made our team stronger, bolstered by the bunker spirit.
Strong leadership emphasizing clarity in communication and transparency where possible will avoid confusion and distrust. Employees are likely anxious about their jobs, as well as their responsibilities outside of work, so it’s vital to support them wherever possible. Having open and frank discussions about the business will also build loyalty and trust. Beyond this, establish and communicate a realistic vision and achievable goals which engages the team and inspires everyone to be productive.
Hiring and firing.
Even when business is operating as usual, recruiting the right people who are invested in a startup’s mission and are passionate about its offering is essential for success. When recruiting new hires, a founder should reflect on the following questions: is this person going to help us meet our goals and mission? How do they fit in with the existing team? Will they add value? Finding the right staff and then investing in their training and development is critical for long-term success. It ensures loyalty and prevents high employee churn rate, which prohibits disruption. As a result of COVID-19, candidates will vastly outnumber the number of available positions, which makes it even more essential to invest in the recruitment process.
Of course, for many, hiring isn’t an option right now. Organisations throughout Europe are taking advantage of furlough schemes and using government support where possible to avoid making cuts. Germany has offered significant short term financial support to startups and the UK’s furlough scheme is supporting.
In terms of new hires, a survey of UK startups revealed that 49 percent have frozen recruitment and 32 percent have slowed down hiring to account for negative revenue predictions. Many companies are also making the difficult decision to lay off staff to preserve capital. Beauhurst estimates that 615,000 startup and scaleup jobs were at severe or critical risk due to COVID-19. For founders making the tough decision to let team members go, it’s critical to act quickly, cut hard and cut ones. It’s hard, but also vital to get it right the first time. Making staff cuts more than once damages team morale and results in uncertainty and anxiety.
Startups should be looking toward their VCs for support beyond cash. Yes, conserving capital is critical right now; the lack of clarity with coronavirus is challenging and forcing businesses to make significant cutbacks. Ultimately, however, if founders fail to recognise the importance of strong leadership and finding the right talent alongside a conservative business model, businesses risk losing out even further.
By: Alastair Mitchell– Partner at EQT Ventures