By Ruiqi Chen
When the coronavirus pandemic hit the United States in late March, Matt Morfopoulos wasn’t too worried.
As co-founder and chief marketing officer of the Oklahoma text message communications startup Respond Flow, Morfopoulos knew that his business model would survive a socially-distant world because of its emphasis on remote marketing.
However, not every startup was expected to be so lucky.
Four out of 10 of startups had only enough cash on hand to sustain operations for three more months, according to research company Startup Genome’s April 21 global report on the impact of COVID-19 on the worldwide startup environment. This is up from less than three in 10 companies with only three months of runway in December.
Nearly two months after the report was released, it appears to be flat out wrong, said David Beazley, a managing partner with venture capital firm Purple Arch Ventures, which invests in startups within Northwestern University’s alumni network. He estimated that a maximum of a quarter of startups might actually be facing financial failure before the summer is over.
Startup Genome did not respond to a request for comment.
The startup and venture capital industries have taken many steps to ensure as many businesses as possible remain successful during the pandemic, Beazley said. This means focusing on startups that are capable of surviving in a post-COVID world where digital and touchless technologies will have an advantage.
“When the pandemic hit, we saw a really, really aggressive, ruthless stand from our founders, who knew they needed to make drastic changes in order to survive,” Beazley said. “We’re seeing additional investments into things like home entertainment and cyber security and touchless everything.”
Some startups, like Respond Flow, were already working on products or services suitable for a touchless and remote world and are subsequently gaining customers and continuing to grow. Founded in 2019, the company closed its pre-seed funding round after the pandemic began.
Respond Flow had been in talks with some venture capitalists in the months before the virus reached the U.S., said Morfopoulos. Though the pandemic slowed its progress because investors were initially hesitant to make new deals, Morfopoulos said some forward-thinking and technologically minded investors were willing to work with Respond Flow.
“We’re actually in a really good spot right now to experiment with markets and also figure out what’s working in this economy,” Morfopoulos said.
Like Morfopoulos, Tracy Wong, founder of virtual reality fashion startup Voor in New York City, also faced funding challenges such as postponed or cancelled meetings with investors as she began her first funding round in March. However, Wong said she isn’t worried about her company’s future, and her team has not stopped reaching out to potential investors and are hoping to raise $2 million in their first seed round.
Voor, designed to replace physical fashion showrooms through virtual reality, is well suited for a post-COVID world, Wong said.
“What we’re doing is really to transform the industry to move away from the physical assets of the fashion industry,” Wong said. “So I knew this (business model) is actually going to help us.”
However, startups with business models that are unrelated to remote communications or services or are not directly fighting COVID-19 might face a tougher time, said Courtney Zhu, a Northwestern alumna who helps startups with their business plans at MATTER, a Chicago startup incubator focused on healthcare innovation.
Startups in industries such as telehealth and telemedicine are seeing even more growth than before as their services become mission critical, said Zhu.
Since the pandemic began in March, about 74% of all startups have laid off some full-time staff and 74% have experienced a decrease in revenue, according to Startup Genome’s April report. Chicago-based startup incubators like 2112, which focuses on creative industries such as music and theater, and MATTER have seen new strategies emerge from their member startups.
“There was a massive shift in operations,” said Amor Montes de Oca, the director of strategic initiatives at 2112. “As an entrepreneur, sometimes we have knowledge gaps that we aren’t pressed to figure out at that particular stage. But when all of this hit, being savvy on social media, being knowledgeable of SEO for your website, how to do e-commerce, all of that became very, very important very, very quickly.”
On May 27, three Chicago incubators including MATTER announced they had raised $1.55 million to go toward providing free memberships to struggling startups and investing in companies working on technologies to fight COVID-19.
This fund will help some startups avoid running out of cash and help them survive past the pandemic, Zhu said. At the same time, she said there are still traditional funding opportunities available.
“There’s this misconception that investors are off limits during the pandemic,” Zhu said. “They’re still continuing to source new deals and do due diligence. It’s just that they might be making less active deals, but that does not mean that the whole process is halted.”
Many investors are doubling down on investments in their existing portfolio and reconsidering new deals with greater scrutiny, said Zhu and Beazley.
“We are seeing venture firms that are pausing,” Beazley said. “Some are pausing for 90 days, some will pause indefinitely and only put money into existing companies in their portfolio that they know will need more capital to survive through what could be a two-year recession.”
However, a crisis as big as a global pandemic might actually be a catalyst for innovation, Beazley said. He pointed to ridesharing company Uber Technologies Inc. and home rental company Airbnb Inc., two highly successful startups valued over $1 billion that emerged out of the 2008 recession and a desire to help people make a little extra money during difficult economic times.
“Sometimes crisis catapults businesses to the front,” Beazley said. “Juxtaposed against the downturn and the struggle that some businesses are going to have, we also think there’s going to be some big winners.”