Launching a start-up during a crisis? It may be a better idea than it seems | weBlog

Have you been brewing your great business idea when the COVID-19 pandemic hit the world? It may seem wild, but you should not be afraid to go on with your project. As a matter of fact, many successful businesses started in times of crisis. The economic downhill provides a strict yet valuable environment for validating ideas, as customers use or buy only what they really need. In general, the amount of required investment significantly decreases, such as the price of workforce due to the increased unemployment rate. But what does – and should – remain the same is the passion for exploring new opportunities, which is the most important asset to invest into your start-up, no matter the crisis.

The key to pull through: a good business model

Examples from the past have taught us that a standalone idea or unique technology does not guarantee success. Although an ambitious mindset is important, the abilities to achieve the break-though is even more crucial. The key is a successful business model, but to create one, you need to identify and know your target audience or customers – what they need, what added value can you offer to them and how the revenues will be generated.

Bear in mind that most investors are no longer seeking companies with the potential to achieve the economies of scale, but instead they are looking for start-ups that can deviate from creating a mass product, in order to offer a customizable solution that adapts to the individual needs of each customer.

When it comes to investments, consider the phase of your business life cycle

At some point, every start-up gets the opportunity of investment – but it all depends on the phase of the business life cycle. As the company develops over the time, so do the investment rounds and investors who are keen on investing.

The first “investors” are usually family members, friends and so-called “fools”; later, there are angel investors, VC funds and finally, PE funds or strategic investors. However, it is always necessary to know exactly what the investment is intended for and to which phase of the business cycle should it transfer you. If a company is already heading to the so-called “A” financing, it often needs an investment from EUR 500,000 to EUR 2,000,000 in order to expand its distribution channels, increase the costs for marketing, business development and sales while proving its ability to do business on a larger scale. It is a completely different scenario from the case of a company that needs EUR 10,000 up to EUR 30,000 at the beginning to materialize the initial idea into a viable product that can be offered to the first potential clients.

Fulfil the commitments towards your stakeholders

While a prudent investor will make sure you do not spend the investment on something that is not agreed in advance or is in contrary to your financial or business plan, in any case, you should always spend the money on what you are committed to by contract. The investor often holds a place in various “advisory boards” and over a certain amount the money cannot be spent without their consent or risk of start-up sanctions. In addition, the company often receives tranches, so the money flows into the business gradually, upon meeting the agreed sub-goals.

 There is still a risk that the start-up may run out of resources before it can reach the next phase and start another investment round. Currently, the problem is the working capital. As companies lose their sales, they are under obligation to pay their employees and suppliers. Their so-called “runway” is simply shortening and it is very likely that numerous start-ups will end before they can “take off”, as they have been running out of resources. Being left without real funds is the biggest risk nowadays.

Take more time to reach your goals during a crisis

More than ever before, start-ups should be aware of how long their current funds can last. If they are in an investment round, it is necessary to acknowledge that the next round may come 3 to 6 months later due to COVID-19.  If the company brings light to the fact that they may not survive till the next investment round, then it is crucial to cut the costs as much as possible and consider the option of a “bridge” financing. At least they can gain some time – which has become one of the most valuable assets every start-up needs currently.

Peter Pašek

Managing Director | Partner | Accace Slovakia

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