In the second Star Wars film 'The Empire Strikes Back', Jedi Master Yoda A startup wisdom in a nutshell:
"Don't try! Do it or don't do it – there is no try!"
The idea behind it: The cautious Attempt Doubt leads to failure. If you want to achieve something, you have to makeThis also explains the reservations many VC investors have about sidepreneurs, i.e., founders who work part-time: Anyone who wants to achieve something must focus all their time and energy on a single venture. The safety net of a day job alongside the startup weakens the absolute will to make the startup a success.
High risk is part of the business model
Startups also work strictly according to the motto 'all in'. New business ideas are initially tested quickly and inexpensively on the market. However, once the decision has been made as to which direction the company should take, all forces are concentrated in one direction in order to grow faster than the competition. Should the chosen path prove to be wrong, a Pivot made the radical turnaround – all at top speed, mind you.
To maximize flexibility, the time horizon for their own planning is often short. Early-stage startups frequently only plan ahead a year or even a few months. Anything else would be illusory: young companies face so many fundamental decisions and diversions that five-year plans are unfeasible.
After the Corona crisis hit the world completely unexpectedly in the spring, the limited visibility proved fatal for many startups: Those who only secure their financing for the coming quarter run the risk of running aground financially during the crisis.
What does this mean for startups in the post-coronavirus era? Do startups need to rethink their risk-taking behavior?
No risk, no disruption
Even beyond the crisis, the startup method is a prerequisite for the emergence of disruptive companies: Under extreme speed and full risk, some companies that might have survived with more cautious management certainly fail. But those that prevail have the potential for true innovation and change. The rapid rise and global triumph of the GAFAM – Google, Amazon, Facebook, Apple, and Microsoft – can only be explained under startup conditions. It is certainly no coincidence that all five digital giants emerged on the American West Coast, a region where, at the same time, hundreds of similarly ambitious startups probably failed.
Instead of a broad middle class, the startup approach produces a global elite of disruptive companies and a field of innovative challengers. An economy that wants to compete globally cannot do without this. In other words: startups have to take risks and move quickly – otherwise, they have little chance of rising to the global elite.
The money is there – but it doesn’t reach the startups
Nevertheless, the current crisis teaches us that safety mechanisms are needed to prevent a clear-cut like the one at the turn of the millennium. The collapse of the Neuer Markt set the German startup scene back years and destroyed a great deal of trust. That must not happen again.
However, if startup companies themselves rely on risky actions and short time horizons to be successful, who should ensure security?
Startups themselves cannot build up safety reserves to survive the lean months or years of a global crisis. In the best-case scenario, however, other players in the startup ecosystem can do this: Venture capital firms, business angels, and family offices with sufficient resources can help their portfolio companies through the lean period. Traditional startup financiers are probably also the best people to contact when it comes to assessing which startups are threatened by the crisis and which would not have survived even without it.
However, the German VC market still lacks capital. According to a current KfW study 0.047 percent of Germany's gross domestic product flows into venture capital investments – only half as much as in Great Britain, for example. It is therefore hardly surprising that venture capitalists do not always have the stamina to support 'their' companies in times of crisis or even provide them with capital for further growth. Therefore, the German government had to intervene and provide startups with a 2 billion euro package Support during the crisis. It's no coincidence that the majority of the money was paid out to startups via VC firms, as they are the most likely guarantors of a functioning startup business model.
Public intervention during the crisis was correct and important. However, if we want to manage the existential risks for startups posed by future downturns, the startup ecosystem needs more money. This requires that, as in the UK and the US, more capital flows to startups from institutional investors such as pension funds, banks, and insurers. The money is there, but too little of it is still being invested in startups in Germany. For this to happen, legislators and the public sector must make some adjustments. But what is needed from the 'old money' side is one thing above all: the willingness to take risks.
If, after the coronavirus pandemic, the realization grows that the German startup ecosystem needs to be better funded, the crisis could have some belated good after all. Or to quote Master Yoda again:
“The greatest teacher is failure.”
