What Happened to the Startup Apocalypse Everyone Predicted?

Read more at marker.medium.com

For many, circumstances became the perfect storm for massive growth

Animation by Carolyn Figel for Marker

“Coronavirus is the black swan of 2020.” So began the ominous letter that venture capital firm Sequoia Capital sent to the founders and CEOs of its portfolio companies on March 5 of last year. In many ways, the note was prescient, published roughly a week before the rest of white-collar America shuttered their doors and pivoted to remote work.

I remember receiving a similar pandemic-panicked email in my inbox around the same time as the Sequoia note. It essentially declared: “Nobody is allowed to come into the office until further notice.” I was in a meeting with approximately 20 other people, and you could tell when someone had just checked their email. Each new reader would immediately start glancing at everyone else in the room in search of runny noses or any other indication of which co-worker was to blame for turning the meeting into a superspreader event.

Businesses worldwide began closing their doors that month and everyone in the entrepreneurial community started predicting the Great Startup Apocalypse. Many seasoned startup observers — from venture capitalists to economists — were expecting destruction of cataclysmic proportions, bigger than that of the dot-com boom and bust of the early 2000s or the financial crisis of 2008. “We suggest you question every assumption about your business,” Sequoia Capital wrote in the aforementioned letter that would soon go viral in the wider business-tech community. The 49-year old VC firm, with hugely successful investments ranging from Oracle to Reddit, outlined six core areas for portfolio companies to focus their attention on: cash runway, fundraising, sales forecasts, marketing, head count, and capital spending. In other words: hunker down, get lean, and prepare to weather the storm.

Fast forward nearly a year, and the predicted extinction-level startup event of the decade doesn’t seem to have materialized. To be clear, I don’t mean businesses overall didn’t suffer: By the end of the year, $523 billion of the Payment Protection Plan was disbursed to help keep small businesses afloat. Even so, nearly 98,000 mom-and-pop stores, making up 60% of temporarily closed businesses due to Covid-19, are now permanently closed, according to data from Yelp; many of them are restaurants that never got bailed out despite having paid insurance for years.

The general startup ecosystem isn’t just surviving; it’s thriving in one of the frothiest markets ever.

I’m also not trying to minimize the suffering of countless employees either. From frontline medical workers combating the disease with scarce PPE equipment to record unemployment rates, it’s clear that workers have faced unrelenting hardships. Nor have startups been immune to the chaos unleashed by the coronavirus. With travel down 50% to 60% amid constant shutdowns, Uber’s ride-shares plummeted by 80% in April and was still down 53% by the third quarter of 2020. (Imagine all the travel industry startups without war chests the size of Uber and how they’re faring in the wake of Covid-19.)

Yet, in spite of all those enormous and unprecedented challenges, the general startup ecosystem isn’t just surviving; it’s thriving in one of the frothiest markets ever. Starting last summer, there were more IPOs in 2020 than there have been in 20 years (with gangbuster initial performances from DoorDash and Airbnb closing things out), an ongoing SPAC mania, and a surge in applications to start businesses. Even Sequoia, a harbinger of doom, wound up having one of the best performing years in its history, posting whopping 11-fold returns on its investments.

So what happened? Is this a case of everyone being wrong, or a case of “the rich get richer, and the poor get poorer.” I think the answer is simpler than all of that. In fact, I have a theory about why the pandemic has, on the whole, been great for startups and equity markets.

In addition to teaching entrepreneurship at Duke University, I consult for a handful of early and growth-stage startups. As the chaos of the pandemic shutdowns hit, the leadership teams of the companies I consult for spent hours in their Zoom war rooms trying to plan how to survive the pending disaster. They were all creating lists of nonessential expenses they could cut immediately, and many of those lists included staff members ranked from most expendable to least expendable, which, as you can surely imagine, is not a fun list to make. It’s particularly uncomfortable when you start having to account for things like, “Person X has four children and the other spouse doesn’t work” versus “Person Y is a dual-income household with no dependents.”

While, ultimately, none of the startups I advise had to fire anyone, they all made the same decisions to impose a hiring freeze, a salary freeze, a travel freeze, and strict spending limits. It was all very draconian and a bit terrifying. I’ll even admit, for a couple days I was worried about my own livelihood. After all, terminating a consultant is much easier than firing an employee.

However, after the initial shock subsided, it became clear that the pandemic had spurred two unprecedented operational shifts that were fundamentally great for business and, without Covid-19, would have been otherwise impossible.

When we put all these factors together: Decreased expenses, increased team productivity, and enhanced sales efficiency, you’ve no longer got a recipe for a startup apocalypse.

First, every startup immediately trimmed the excess fat from their budgets in ways they couldn’t have all possibly done pre-Covid-19. For example, had each of those companies told their employees: “You’re not getting any raises, we’re not hiring anymore help, no more swanky tech conferences in exotic locations, and oh, by the way, we’re going to stop spending thousands of dollars every month stocking the fridge with free La Croix,” some would likely have faced full-scale employee revolts. Instead, their employees were all thankful they still had jobs. As a result, every company immediately reclaimed 15% to 20% of its cash flow. That scenario is basically a CEO’s dream come true.

The second shift spurred by the pandemic was — as you surely already know — a shift to remote work. While I’m sure it was a difficult adjustment, once people get comfortable with working from home, remote teams are often more efficient and productive than in-person teams. Nobody has to commute, employees that work from home are more likely to engage in work activities during nontraditional work hours, and office small talk is eliminated.

I’m not suggesting it’s healthy for employees to lose any of the above things. But when you add an extra couple of hours to every employee’s day for 11 months — which is exactly what the pandemic has done — you’re basically creating an extra 10 or 11 weeks worth of productivity from each employee. That’s a ton of additional productivity.

In addition, remote work isn’t just more efficient internally. It’s also more efficient in relation to external operations, particularly with regard to sales. That’s because, prior to Covid-19, selling something for more than $25,000 was difficult to do over Zoom. High-dollar sales typically required in-person salespeople traveling around the country, or internationally, to close so-called “enterprise” deals.

Thanks to the pandemic, that’s all changed. In the Covid-19 world, sales teams can close big deals via Zoom. Better yet, the same salesperson can target two enterprise deals on opposite sides of the world in ways that could never have been done previously. For example, in the past, if you wanted to sell a million-dollar contract to a company in New York and another one in Los Angeles, you couldn’t work those deals in the same day because they both required in-person meetings. But now, a salesperson can leave a meeting in New York and be at a meeting in L.A. within seconds. How’s that for efficiency?

When we put all these factors together — decreased expenses, increased team productivity, and enhanced sales efficiency — you’ve no longer got a recipe for a startup apocalypse. You’ve got yourself the perfect scenario for massive growth, which is what appears to have happened, and startups are reaping the rewards.

Now, I’m not arguing any of the above is good for startup employees, their morale, or their mental health. In fact, there’s probably a good argument to be made about how it’s terrible for employees (as it turns out, Covid-19 burnout is very real). But the startups themselves are certainly benefiting. In fact, from their perspective, the biggest threat to their continued success might be the end of the pandemic. Once that happens, employee expectations, costs, and inefficiencies are going to rise. In other words, if you’re a startup CEO, start stocking up on the La Croix now because your employees are going to expect a full fridge — and catered lunches — when they head back into the office.

Read more at marker.medium.com

Show More

Related Articles

Back to top button