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Corona, Other Crises And Their (Not So) Comparable Effects On Startups

Haphazard stock markets. Expansive lay-offs. Impending corporate bankruptcies. Government bail-outs. Global economic downturn. Manifold are the characteristics that the current coronavirus crisis shares with its 2008 predecessor.

Social distancing. Reduced mobility. Home-schooling. Remote work. Unprecedented government intervention in personal lives. Just as numerous are the features unique to the Covid-19 crisis, making it all the more severe – not just from the standpoint of an impending recession worse than that of 2008 but because of its transformational effects on society.

While 2020 will go down in the history books as a disastrous public health crisis, the dire situation the pandemic leaves us in may serve as an increased push for entrepreneurial ventures to help society solve some of its most pressing issues in the face of fundamentally altered rules of the game. In fact, it was in the direct aftermath of the financial crisis that a number of the now most revered unicorns hatched, including Uber, Airbnb, Pinterest and Dropbox. So, what are lessons from the past that can serve as guideposts now to create a corona-inspired Uber-equivalent? And what is different?

Entrepreneurs and business leaders now are well advised to follow two proven strategies from past crises: one, addressing a need resulting directly from the crisis, thus appealing to a new customer mindset, and two, ensuring that the business model shortcoming which caused other firms to tank is avoided, thus alleviating investor concerns.

Several of the post-financial-crisis startup successes directly spoke to increased consumer awareness and differences in consumer preferences as a result of the crisis. Think, for instance, Credit Karma, which launched in 2008 and recently got acquired by Intuit for $7.1 billion: it provides consumers with their credit information so they can make more informed financial decisions. It was this very value proposition – more timely and relevant in a post-2008 economy than ever before – that allowed Credit Karma to gain traction quickly and secure sizeable Series A funding even in the direct aftermath of the crisis. Similarly, while the dotcom bubble bust had horrific effects – including eradicating market values, costing investors billions of dollars and thousands of people their jobs and livelihoods – it was in its aftermath that companies such as Google rose to prominence. With its promise of a free service to users paired with a simple yet promising business model with a proven revenue generation track record, it led the way into a new era of tech supremacy, annihilating post-dotcom bubble concerns.

It stands to reason that the 2020 corona crisis, while devastating in its effects on public health and the global economy, may also spur innovation to address the most pertinent societal and business implications of the crisis. Entrepreneurs and business leaders must bet on the digitally-powered horses – those business models whose value-add is generated and rendered through digital means. There are some obvious cases in point already, including ZOOM which is getting the biggest piece of the oh-so-delicious virtual conferencing pie. To land more of such whales, entrepreneurially minded leaders must confront themselves with the new realities of (work) life to spur their ideas for new ventures: If the NYSE no longer needs to be physically open for world trade to happen, how will trading change? If people are happy doing their workouts at home, what will this mean for gyms? If curbside delivery is the new standard for your grocery shopping and meals, what will this mean for retailers and restaurants? If necessity begs ingenuity, we are likely to see ingenious ideas soon.

Ingenuity aside, an idea alone is always only one part of the equation. For entrepreneurial ventures to succeed, they also need money. Enter private equity and venture capital. One may think that the hit they are taking on their portfolio companies would invariably disadvantage them in times of crises, but that is not the full picture. The effects of downward corrected valuations are indeed felt by PE firms – which are trying to lobby for their share of the government bail-out money to boost their portfolio companies. But, luckily for startups, unlike in the aftermath of the financial crisis, PE and their VC peers are now wide open for business, flush with cash and ready to pounce. With the PE industry starting into 2020 with a record $1.5 trillion in dry powder, PE firms are ready to use the unspent capital sitting on their balance sheets to score prime deals. In fact, they may not only be able to weather the corona storm well, they and their VC companions may be uniquely positioned to take full advantage of it because they have a shot at snapping bargain prices. This is not only true for the startups whose overvaluations are becoming a thing of the past, but also for entire industries that have been hit hard and may be subject to consolidation soon (think, travel and hospitality). This is an opportune moment for investors to look for portfolio additions that tick the previously mentioned boxes, as the digitally-powered Credit Karmas and Googles of the corona times are waiting to be found.

Just like the 2008 financial crisis, the dotcom bubble bust and even the Great Depression, the aftermath of corona will be a breeding ground for change and consolidation. In other respects, however, it will be unparalleled. Following the 2008 crisis, the change we underwent was mostly confined to Wall Street. But now an invisible virus that affects all of society has taken center stage. In order to combat this protagonist dispersed among us and not only concentrated on a select few, it will take far-ranging, radical transformation fueled by disruptive startups and visionary entrepreneurs and leaders to get the economy back on its feet. But then we have a shot at real change.

The author gratefully acknowledges the help of HBS Professor Marco Iansiti in developing this piece.

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