Technology and Disruptive Commerce

Strategies for Startups Navigating a New Reality

Scenario planning and lessons from past downturns can help leadership teams guide their startups through an uncertain economy.


As part of our Disruption video series, I recently spoke with my colleague—Anne Berry, Executive Director, J.P. Morgan Corporate Finance Advisory—to discuss the potential she sees for tech and e-commerce startups right now. Read below for some of the highlights from our talk, and watch the full conversation for more insights.

As the COVID-19 crisis has rocked the global economy, it has also upended the best-laid plans made by startups in every industry. It’s helpful for high-growth companies to look at lessons from past downturns to find pockets of opportunity as they navigate this uncertain landscape.

“I think some of the trends that we saw before the recession might accelerate as we come out of it,” Berry says. “This very challenging time is allowing some firms to highlight what they do best to their customers in a way they might not have been able to do before the recession.”

Take the case of Amazon.

“It’s not like Amazon was highly profitable during the dot-com bust, but they still went after cost savings while figuring out ways to take advantage of shifting consumer appetite and shifting consumer sentiment,” Berry says. “So offering low prices to their consumers while cutting costs internally allowed them to grow significantly during the dot-com bust and come out of the whole period that much stronger.”

 

Chart a Way to Survive—and Maybe Thrive

Many startups would like to emulate the ways in which companies like Amazon, Netflix and Google have continued to enhance the customer experience, grow market share and scale their operations through tough economic environments. But Berry points out that not every company will have that opportunity: “For a lot of firms, the focus is going to be on getting through the recession so they can go back to the opportunities they saw before it.”

When recalibrating your business strategy, it’s important to have a sense of where your company falls on the spectrum of aggressive opportunism and survival mode before turning an eye to the capital markets.

 

Take Time to Revisit Your Startup’s Growth Story

2020 was poised to be another big year for VC-backed IPOs until the coronavirus pandemic. But while most IPO plans remain on hold, leadership teams at startups looking to go public may need to reevaluate the narrative they tell investors and analysts.

“It’s going to be another set of challenges for companies who were ready to tell their story and now have to think about how to do that in a post-COVID or ongoing COVID world,” Berry says.

That’s because this crisis isn’t just impacting financial outcomes—it’s creating a seismic shift in consumer behavior. Both the intensity and longevity of those behavioral changes remain uncertain as the world’s scientists search for a vaccine.

 

Tactics for Navigating This New Environment

After assessing the trends that emerged from previous recessions and noting the unique qualities of today’s downturn, we’ve identified some tactics, both offensive and defensive, that startups can use to navigate this new environment. Every company should assess its own unique position with respect to its balance sheet, market realities and tolerance for risk before it can confidently develop the strategy that is right for it.

 

5 Ways Startups Can Shore Up Their Defenses

  1. Consider different scenarios regarding the depth and length of the recession, along with the potential shape of the recovery, to assess what different outcomes would mean for your business.
  2. Maximize responsiveness to deal with different scenarios as more information becomes available.
  3. Evaluate new sources of liquidity for cash needed to fill the gaps in different scenarios, including: reducing operating expenses by cutting what’s unnecessary now and renegotiating every possible contract, improving working capital, accessing new government lending programs, raising equity and selling the business.
  4. If raising equity or selling the business is off the table, carefully calibrate valuation expectations against your assessment of recovery scenarios. Also be sure to maintain relationships with potential suitors and investors.
  5. Stay in touch with your banker as you proactively communicate on all of the above to optimize your outcomes.

 

3 Strategic Opportunities for Startups on the Offensive

  1. Conduct A/B testing—with new processes, products or payment models, for example—to determine how to best serve customers in the new environment.
  2. Take advantage of shifting customer behavior to capture new segments.
  3. If your business has sufficient liquidity, consider making investments via acquisitions or hiring strong talent.

Every company is going to experience the economic upheaval through the lens of its own unique position. Rigorously planning for a variety of scenarios can help your startup navigate this shifting environment with confidence and increase the odds of a successful emergence on the other side of it.

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