Running a startup is not for the faint-hearted. Even in more favourable times, there’s the constant struggle with firefighting, funding, and just generally surviving.
But the current disruptive environment has made start-ups particularly vulnerable. Efficiency, productivity, and growth have come under even greater pressure, while liquidity challenges and securing funding have become harder to manage than ever before.
Farewell to funding?
As the impact of COVID-19 took hold, many potential sources of funding evaporated as investors withdrew in order to protect existing investments.
In March 2020, Australia closed only 12 funding deals compared with 49 in the same month last year – a more than 75%year-on-year decline. Of those funded, the bulk were for more established start-ups securing bridging funds or liquidity top-up rather than seed funding.
Given the ongoing economic volatility, start-ups will have to readjust their mindset and strategies to cope with this new business reality.
The good news is that funding will not disappear completely, but it will be harder to secure as the pool diminishes and investors become more selective. In response, start-ups must pivot from focusing on growth to a focus on revenue as the need for cash becomes the key driver for survival.
From growth to revenue
Modern startups burn cash as they grow market share on their way to making a future profit. That spend is a result of huge market valuations for their business and even higher funding to maintain momentum.
But as funding diminishes, efficiency and productivity must increase to compensate. Most businesses do not fail because they lack a product or customers – they fail because they lack cash flow.
Startups have multiple options, but most require eliminating emotion from decision making – something particularly difficult for startups.
The initial priority is to secure as much cash as possible to help stay afloat longer term. As survival is the imperative, it will require making some tough calls – especially around personnel and roles.
Another option is to reassess the business model – in other words, don’t be stuck to your dream. Investigate new opportunities that your tech, service, or solution can adapt to, particularly in response to new customer needs in a post-pandemic world.
Supply chain overhaul
Given the rapid economic downturn, every Australian business – regardless of its size and age – is dealing with the negative impact on efficiency and productivity brought about by the personal, social, and practical distractions of COVID-19.
While these concerns are shared across the economy, supply chain disruption has had a massive impact, and it is one many start-ups will struggle to overcome.
Even large enterprises, with well-established and diversified supply chains, have had to come to terms with their own fragility. In the early days of the pandemic, retailers across Australia had to enforce strict purchase limits on a number of staple items – toilet paper, rice, and pasta among them.
Startups tend towards more discrete supply chains, drawing from a smaller group of suppliers which leaves them even more exposed.
As China is the primary bulk supply market for affordable basic components, the reduction in output due to factory closures, staff restrictions, and diverting supplies may hinder order fulfilment and cash flow – the lifeline of any start up. This has flow-on effects, impacting credibility, reliability, and reputation which are fundamental building blocks as ventures start to secure customers.
To overcome this, start-ups should look to accelerate supply chain diversification in the longer term, while enhancing policies around productivity, efficiency, and resilience short term to ensure delivery and accountability, at or away from the office.
A catalyst for change
Ultimately, we will see startups realign and adapt. The faster they do, the more chance they have for survival, but what that looks like will differ for each business.
For many Australian entrepreneurs, this is the first recession they have faced. Nutanix was born amidst the fallout from the global financial crisis so perseverance, rigid focus on cash flow, and a passion to upend the status quo kept us transfixed on survival in the short term and industry leadership in the long term.
We also developed a ‘sage network’ of experienced mentors who had survived difficult times and could objectively advise, reassure, and guide our actions.
Times are tough now, but the start-ups that come through this will be stronger, more resilient, and much better equipped to adapt and re-invent themselves against any major hurdle in the future.
- Matt Young is SVP, Head of Asia Pacific and Japan, for Nutanix