The coronavirus crisis is shining a magnifying glass on the strengths and weaknesses of startups. With their speed, flexibility, and pragmatism, startups actually have a significant advantage over their traditional competitors in the current situation. Yet many healthy, young companies will not survive this crisis. A comment.
The term "startup" has become quite vague in recent years. In emails to our editorial team, PR agencies and founders tout their furniture startup (carpentry), sales startup (sales consulting), productivity startup (sales of office equipment), or fitness startup (provider of fitness classes). We then usually explain that these business models do not fall under our definition of a startup—which, of course, does not imply any statement about our opinion of the company or its future success.
By the term 'startup,' we mean a specific type of company. The coronavirus crisis has clearly demonstrated what distinguishes them from other companies—because they are better able to handle the crisis than many others, yet are at an even greater risk of their survival.
From “honorable merchants” to startup entrepreneurs
Roughly speaking, we differentiate startups from other companies based on three criteria: They are less than ten years old, they strive for exponential growth, and they are innovative in some way – in their product, their business model, or even just in their marketing.
The real difference between the traditional model of entrepreneurs as "honorable merchants" and the new type of startup entrepreneur, however, is quite different: Everything startups do is geared towards speed, flexibility, and demand. Instead of sophisticated products, startups develop a "minimum viable product," i.e., a prototype that is just barely functional, which is then tested for "product-market fit," i.e., real market demand. If the product and market don't match, the product is either modified, a new market is sought, or the product is discarded and, at best, an aspect is used for a new prototype. While traditional product development often takes several years, a cycle of prototyping, testing, and adaptation often takes only a few weeks or months.
Ideally, a traditional company generates the money for product development, personnel, marketing, and so on itself. If necessary, a loan is taken out for necessary investments. Startups, on the other hand, are typically not creditworthy. They usually don't generate any profits; in fact, they require a lot of outside capital for their rapid growth.
Rapid responses to the crisis
With the onset of the Corona crisis, it was clear to see how much startups have the ability to react quickly to a changing market in their blood. In our Video series #CoronaUpdate Startup founders and employees describe how they experience the crisis and how differently their company has reacted to it. Knister Grill For example, it has quickly ramped up production of a balcony bracket for its grills, thus enabling its main product to find a new application at home. Luminovo uses the low-order period to revise its business model. Building Radar has even experienced increasing demand and restructured its online marketing.
Within just a few weeks, these young companies have radically questioned their business models and reinvented themselves in light of the changing conditions. Such a change of course in such a short time would be unimaginable for a medium-sized company.
The aid package will not save everyone
However, the speed at which startups operate can also be their downfall in a crisis. Hardly any young company has any real cash reserves, other than funds from the last financing round, which must last until the next capital raise. Insiders say that the initiation of new investments has largely come to a standstill during the coronavirus crisis. The deals currently being processed could be the last sip from a pipeline with no inflow. It is still completely uncertain when venture capitalists will be able to and will open the money tap again.
The survival of many startups is therefore a game of chance: those who have just received fresh capital are much more likely to survive the coming lean period than a startup that was just in the final stages of a financing round when the money dried up. The German government has already 2 billion euro aid package for startups It was said that a loss of innovative power and a sell-off of know-how to China and America had to be prevented. Still slowing down Uncertainties regarding funding conditions the already ailing investment landscape. But even if billions of federal funds are released, not all startups will be able to survive 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 artificially kept alive. However, it's already clear that the crisis will also cost many healthy startups their lives.
