Impact of covid19 pandemic on startups & small businesses

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Impact of covid19 pandemic on startups & small businesses

Four months ago, during the early days of Covid-19, many speculated that the venture-backed startup universe might halt or even dry up. On April 1st, The New York Times even reported that “the great unwinding” of the tech boom had begun.

Fast-forward to mid-summer and the conversation in the Bay Area and other technology hubs has entirely changed. The pandemic has had a meaningful impact on the life of startups – but not always in expected ways. Some industries have thrived, even accelerated, while others now face secular declines, with structural transformations ahead. But overall, the net effect of Covid has been to accelerate the disruptive role of technology across industries.

Nonetheless, a clear bifurcation is emerging. At the top are industries whose businesses have enjoyed growth and expansion during the Covid pandemic. On the bottom are those industries that have been disrupted and possibly permanently derailed. In both cases, entrepreneurs and company boards are working to draw the right lessons from the early months of lock-downs in order to help startups emerge on the other side of Covid still intact, and ideally stronger. Examining who is winning and who is struggling – and what that bodes for the future — might now be the most important conversation in venture capital.

Some Industries Are Accelerating
One point appears clear: we are in a highly uncertain period and no one knows how long the current situation will last. Still, some patterns are unmistakable. Chart 1 lists the industries where startups have not only survived through the first few months of the pandemic, but have actually improved their business.

Chart 1:

Industries thriving under Covid-19 include ecommerce, SaaS, and collaboration software.
Industries that are thriving under Covid-19,[+]
At first glance, some of this shouldn’t be surprising. The best startups in these industries had enjoyed growing revenue, strong balance sheets, and loyal customers long before the coronavirus arrived. As government and society scrambled to cope with the effects of a pandemic, the secular trends already underway pre-Covid advanced rapidly.

There are good reasons to believe these are not just short-term shifts. The decision to embrace and expand a commitment to the public cloud, SaaS, and collaboration software, for example, is a one-way door: once entered, it will be difficult and undesirable to reverse course. Covid is proving to be a strong catalyst and accelerant for the journey to cloud. Health care tech, whether it is in vaccines, treatment or testing is proving essential to both the established players and the embryonic innovative firms. Meanwhile, tele-health has experienced a surge that is likely to be more broadly embraced as part of a new normal. Media, gaming, ecommerce, and work-from-home cybersecurity have also become “the only game in town” while states and businesses experiment and struggle with reopening economies. For all these industries, Covid-19, despite its dire public health consequences, has become an enabler.

Can all the companies that have experienced a boost keep the momentum going? Here there is less certainty. Collaboration software is in high-demand and in a few quick months has earned new customer loyalty. But it is also a crowded field and at some point, users might grow weary of multiple applications for video conferencing, collaboration, and project management. Knowledge workers may eventually seek best-of-breed tools, possibly forcing consolidation. There is tremendous room for innovation and advancement, though startups will have to eventually contend with the success and reach of Microsoft Teams and Zoom.

Ecommerce, another winner in the last few months, will continue to thrive and there is little reason to doubt the sustainability of Amazon and Shopify. But niche online retailers will be under pressure once physical stores reopen and will need to deploy a combination of AI, machine learning, and analytics to develop a deeper understanding of their customers and what it will take to keep them.

Some Industries Are Struggling
On the other side of the ledger are the industries where startup companies have been hit hard by Covid, listed in Chart 2.

Chart 2:

Industries struggling under Covid-19 include live events, physical retail and legacy software
Industries struggling under Covid-19, according to[+]
For the startups in these industries, there are really three choices: first, cut costs, strengthen balance sheets and hunker down; second possibly prepare for a sale or shut-down; third put all resources behind transforming the business towards a new post-Covid secular future. VC investors and startup board members who want to see their companies endure are now focused intently on the third, as crucial to their survival and resurgence.

Within information technology, spending has shifted from new initiatives to efficiency, remote employee productivity, and cost savings. Areas that are hit especially hard include on premise enterprise IT, legacy software and IT services. Internally facing projects that don’t impact customer topline have taken a back seat. Legacy software vendors and on premise technologies should expect adverse structural shifts in the post Covid era, with their maintenance revenue streams also headed towards inevitable decline. These businesses have limited windows to reinvent themselves within hybrid IT and the journey to the cloud.

If legacy software is to have a chance in the post-Covid world, it will need to be re-written for the cloud with foundational architecture changes including APIs, containerization, orchestration and resiliency. As IT services resume, they will be less on-premise and more cloud workload focused, more automation related and potentially with higher levels of on-shoring. Making that transition will be a test of viability.

Businesses Are Evolving
Business evolution is also underway in other areas. With urban passenger traffic plunging, ride sharing companies like Uber are investing significantly in home delivery. Their pending acquisition of Postmates is not only a signal of consolidation in the restaurant delivery business, but also suggests that growth in the ride sharing business will come from the on-demand delivery of food, groceries, retail goods, and documents.

Restaurants and live events will, for the most part, have their fortunes tied to fluctuating local regulations. In the meantime, the startups in this space will need to rethink how they can operate. Ghost kitchens, perhaps offering multiple menus and collaborating with delivery services, appear to have a promising future. Concerts, theater, and other live entertainment will be challenged, but the startups that can bring these activities to life through live-streaming, augmented reality, and interactive experiences have a chance of helping to reinvent these industries.

Physical retail, with the exception of Walmart and a few big-box retailers and grocers, had already gone through several years of decline and uncertainty. On the other side of Covid-19, retailers who survive must think through new in-person selling models, aided by technology that creates highly personalized experiences, more expert information and analytics, and bespoke product development and delivery. For some entrepreneurs, this will be the new retail opportunity.

The shock of a global pandemic has left us with an inescapable conclusion about the future of tech startups: hunkering down and hoping the future will look like the past is not a viable strategy. Existing startups need to evolve towards post-Covid futures where technology innovation and digital experiences will be even more instrumental to business success.

VCs are eager to fund both existing companies and new entrepreneurs who can take advantage of the pause in the normal business cycle, and lay the groundwork for the post-Covid economy