How founders can use the recession to their advantage, Covid-19 times

By Yuri Cataldo, Strategist yuricataldo.com interesting article with some positive insights during these Covid-19 times 

How founders looking to start a company now can use the recession to their advantage, help shape the “new normal” of funding, and innovate their way into the next big thing.

It started with an email. The financial crisis of 2007 was just beginning, and Joe Gebbia and Brian Cheksy were struggling to pay their rent in San Francisco. A big design conference was coming to town and hotel vacancies were scarce. On Sept 22nd, Joe emailed Brian his idea to “make a few bucks – turning our place in to ‘designers’ bed and breakfast.’” That idea eventually turned into a 31 billion-dollar company. Though it seems incredible, the emergence of a mega-startup like Airbnb during a financial crisis is not that unique. Other superstar startups that emerged in that era include Uber, Slack, Pinterest, WhatsApp, Square, and Venmo. And the list continues. Previous eras of financial turmoil have birthed many of America’s best-known companies: General Motors, Hyatt, FedEx, Trader Joes, HP, Disney, Microsoft, Burger King, Apple, GE, IBM, CNN and Tollhouse Cookies among them.

Today’s economic climate is scary, but anyone looking to start a company should start right now. Paul Graham, the co-founder of Y-combinator, asserts on Twitter that “any startup that gets started during the next few months is disproportionately likely to succeed.” Eras of financial uncertainty, and their accompanying host of environmental stressors and challenges, force companies to be more innovative and resilient. So, what can we learn from companies birthed in the flames of the last recession, and how can companies take advantage of what’s coming next?

Less money = more innovation

Founders use recession to their advantage, Covid-19 times

Jan Korm and Brian Action, founders of WhatsApp, disliked the idea of taking any funding when they started their company in 2010. For the first few years, Jan and Brian took no salary and worked in a cold warehouse sublet. Instead of taking VC funds early on and scaling rapidly, they kept their company lean and relentlessly focused on the actual needs and desires of their users. It wasn’t until 2013, when WhatsApp boasted a staff of 50 and a user base of 200 million, that both founders decided it was time to raise money “for payroll insurance.”

Pressure-driven growth

In 2009, Stewart Butterfield and his team at Tiny Speck set out to create a new game for the online role-playing market. They raised 15.7 million dollars to develop a game called Glitch. Four years later pressure was on for Butterflied and his 45 employees. Although they had nearly 16 million in funding, the game never attracted an audience large enough to sustain itself. Two months after Glitch was launched, they had to shut it down and lay off most of the company. Fortunately, the team simultaneously stumbled into a real problem: communication across remote teams.

SLACK (Searchable Log of All Conversation and Knowledge) was created out of necessity. When its value was discovered, the company abandoned the unsuccessful Glitch and pivoted to SLACK instead. Today, more than six million people rely on Slack to “Be Less Busy.” As today’s market evolves, the team behind SLACK faces a new challenge – evolving beyond a popular workplace chat app to become an indispensable part of corporate life.

Obsessive customer focus

In 2010, two friends Travis Kalanick and Garret Camp built Uber as a project to address the serious taxi problem in San Francisco. The team realized early on that there were infrastructure problems with transportation in larger cities and those cab companies were unreliable, had poor customer service, and had no accountability system for bad user experience. With the customer in mind, Uber created a service that solved those issues.

They made their service more convenient than the traditional cab companies by allowing anyone to order a car at the push of a button, offering higher levels of customer service, let the riders rate drivers and vice versa to keep the weed out the community of bad actors, and allowed the customers to monitor their driver so they knew when they’ll be arriving instead of guessing.

We are already seeing startups fail at an alarming rate, and the VC world isn’t coming to save them. Even companies highlighted in this article are feeling the economic squeeze and pivoting to other business models. In The New York Times, Martin Pichinson, head of a Silicon Valley advisory firm, describes this year as “the great unwinding.” Not only does this unwinding involve individual companies but it also includes the outdated system that funded them.

Many VC’s publicly boast of their efforts to improve diversity in the tech world. However, despite data-backed evidence that startups with diverse teams are more profitable, less than 10% of VC capital goes to LGBTQ, people of color, and women founders combined.

Like the 2008 worldwide financial collapse of the dot-com bubble of 2000, 2020 will be another pivotal year. Most tech startups who haven’t yet found their customer base will collapse. However, this “new normal” offers the chance for an even greater unwinding of an old and unjust system. In its place, a new world of increased opportunity and inclusion could take shape, hopefully with increased access to equitable funding and opportunities.

With less access to traditional funding, startups old and new will need to take advantage of new funding models. The VC world will need to adapt. The next great companies will come from places investors are not used to looking and from teams that don’t look like them.

The road ahead is not an easy one. In a post-COVID-19 world, innovation and customer focus will be essential. As industries converge, new opportunities will arise for teams that are agile and creative enough to seize them. Customers will be looking for solutions to new problems and will reward teams that care about the same things they do. Investment money will flow more readily to customer-obsessed projects that prove they can gain market traction in a down economy.

Leaders that harness the adversity they face now to focus on real customer pain points, stay lean, and pivot when needed will be the ones who not only make it through to the other side but also innovate their way into the next big thing.

By Yuri Cataldo, Strategist yuricataldo.com

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