In the second Star Wars movie ‘The Empire Strikes Back,’ Jedi Master Yoda sums up a startup piece of wisdom:
“Try not! Do or do not – there is no try!”
The idea behind it: the doubts created by a cautious attempt lead to failure. If you want to achieve something, you have to do it. That also explains the reservations many VC investors have when it comes to sidepreneurs, or founders whose startups are a side gig. Those who want to achieve something, have to focus all of their time and energy on one venture. That means the safety net of a day job while founding a company weakens the absolute determination to make a startup a success.
A high level of risk is part of the business model
In all other respects as well, startups work strictly according to the ‘all in’ motto. New business ideas are first quickly and cheaply tested on the market. Then as soon as the decision is made as to which direction the company should take, all efforts are concentrated in one direction to grow faster than the competition. If the adopted path turns out to be the wrong one, then a pivot is made as a radical about-face – and, mind you, it’s all done at top speed.
To have the maximum amount of room to maneuver, the time horizon for their own planning is often short. Early-stage startups often only calculate one year or even just a few months in advance. Anything else would be unrealistic: Young companies have so many fundamental decisions and crossroads ahead of them that five-year plans are not feasible.
After the corona crisis took hold of the world by surprise in spring, the short-term perspective of many startups proved to be their undoing: Those who always only secure funding for the next quarter run the danger of financially running aground.
What does that mean for startups after corona? Do startups need to reconsider how they approach risk?
No risk, no disruption
Even beyond the crisis, the startup method is essential for disruptive companies to emerge: At top speed and taking full risk, surely some companies fail that might have otherwise survived at a more cautious pace of doing business. But those companies that do make it have the potential to bring about real innovation and change. The rapid rise and global triumph of GAFAM – Google, Amazon, Facebook, Apple and Microsoft – can only be explained under startup conditions. It is certainly also no coincidence that all five digital giants emerged on the American west coast, a region where hundreds of equally ambitious startups most likely failed during that very time.
Instead of a wide range of SMEs, the startup approach brings forth a global elite of disruptive companies closely followed by a runner-up group of innovative contenders. A national economy that wants to play in the global game can’t afford to opt out. Or in other words: Startups have to take risks and be fast – otherwise they barely stand a chance of reaching a leading global position.
The money is there – but startups aren’t getting it
And yet the current crisis is teaching us that security mechanisms are necessary to avoid the decimation that occurred at the turn of the century. The collapse of the new market set the German startup scene back by years and destroyed a great deal of trust. That can’t be allowed to happen again.
But if startup companies rely on taking risks and short time horizons to be successful – who should ensure their security?
Startups can’t build any safety reserves for surviving the lean months or years of a global crisis. In the best case, these would be provided by other players in the startup ecosystem: Venture capital firms, business angels and family offices with sufficient resources could help their portfolio companies through the dry spell. Classic startup financiers are perhaps the best people to contact when it’s a matter of assessing which startups’ survival is threatened by the crisis and which would never have made it even without the crisis.
And yet there is still a lack of capital in the German VC market. According to a current KfW study, 0.047 percent of the German gross domestic product ends up in venture capital investments – only half as much as in the UK, for example. It’s hardly surprising then that venture capitalists sometimes run out of steam when it comes to supporting ‘their’ companies in the crisis or even giving them capital for additional growth. That’s why the German government had to intervene and support startups in the crisis with a 2 billion euro package. There is a reason that the majority of the money was paid out to startups by the VC companies, since they are most likely to be a guarantor for a functioning startup business model.
Intervention by the public sector was appropriate and important in the crisis. But if we want to be able to control the existential risks that startups face due to future slumps, the startup ecosystem needs more money. This makes it necessary, like in the UK and the US, for more capital from institutional investors, such as pension funds, banks and insurance companies, to go to startups. After all, the money is there, but too little of it is invested in startups in Germany. For that to happen, legislators and the public sector need to make some influential adjustments. And what is also necessary from ‘old money,’ is one thing above all else: The willingness to take risks.
Should the realization set in after corona to improve the financial support for the German startup ecosystem, then the crisis will have had a positive aspect in retrospect. Or to once again use the words of Master Yoda:
“The greatest teacher, failure is.”