The Crisis Will Take the Lives of Healthy Startups

As if under a magnifying glass, the corona crisis has exposed the strengths and weaknesses of startups. With their speed, flexibility and pragmatism, startup companies are actually well ahead of their conventional competitors in the current situation. And yet, many healthy young companies will not survive the crisis. An editorial.

The term “startup” has become rather indistinct in recent years. In emails sent to our editorial office, PR agencies and founders celebrate their furniture startup (carpenter’s workshop), sales startup (sales consulting providers), productivity startup (office furniture sales department) or fitness startup (fitness class providers). We usually then explain that those business models are not considered startups by our definition – which by no means says anything about what we make of the company or its future success.

With the term ‘startup,’ we’re referring to a specific type of enterprise. The corona crisis unmistakably highlights what distinguishes and differentiates them from other companies – they can deal with the crisis better than many others, but their survival is much more at risk.

From “businessmen of integrity” to startup entrepreneurs

Roughly speaking, we differentiate startups from other companies based on three criteria: They’re no more than ten years old, strive to achieve exponential growth and are innovative in some way or another – with their product, business model or also just with their marketing.

The real difference between the traditional concept of tradespersons as “businessmen of integrity” and the new type of startup entrepreneur is something quite different: Everything startups do is designed to be fast, flexible and meet demand. Instead of sophisticated products, startups develop a ‘minimum viable product,’ in other words a prototype that just manages to function, which is then tested to see if there is real demand on the market with its ‘product market fit.’ If the product and market don’t fit, the product is either modified, a new market is sought out or the product is discarded and, ideally, some aspect of it is used for a new prototype. While taking a few years’ time is normal in classic product development, a startup’s cycle of prototyping, testing and adapting often takes just a few weeks or months.

The money for product development, staff, marketing and so on is ideally generated by classic sales. For essential investments, money is borrowed if necessary. Startups, in contrast, don’t generally have a credit standing. They usually make no profit either, but instead require a lot of other people’s money for their rapid growth.

Quick reactions to the crisis

As the corona crisis took hold, you could very much observe how ingrained it is in startups’ DNA to quickly react to a changing market. In our video series #CoronaUpdate, startup founders and employees explain how they’ve experienced the crisis and how differently their companies have reacted to it. Knister Grill, for example, ramped up their production of a balcony mount for their barbecues within next to no time, giving their main product a new use for at home. Luminovo used the downtime to revise their business model. Building Radar even saw an increase in demand and restructured their online marketing.

Within just a few weeks, some young companies radically scrutinized their business models and reinvented themselves in line with the changed conditions. For a mid-sized company, that kind of change in strategy in such a short time would be unconceivable.

The aid package won’t save everyone

The speed at which startups operate might also prove to be their demise. Few young companies have real cash reserves apart from funds from their last round of financing that have to last until their next opportunity to raise capital. The word from insiders is that the initiation of new investments in the corona crisis has practically come to a standstill. The deals being made at the moment might be the last drops from a pipeline without further inflow. There is still no certainty whatsoever as to when venture capital investors can or will turn the money supply back on.

The survival of many startups is therefore much like a game of chance: Those who recently received fresh capital will have a much better chance of surviving the drought than a startup on the last legs of a round of financing whose money is running dry. The German federal government has already implemented a 2 billion euro aid package for startups. It is apparently meant to prevent the loss of innovative capabilities as well as the selling off of know-how to China and the US. Yet uncertainties regarding eligibility conditions continue to dampen investment activities that were already crippled to begin with. And even when the federal billions begin to flow, it will certainly not be possible to save every startup in the crisis.

Selection is an important process for the startup ecosystem. A company that can’t find a market for its product shouldn’t be kept on life support. One thing is already clear now, namely that the crisis will also take the lives of many healthy startups.

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