Finance professionals are the unsung heroes of the startup world. In normal times, they can help founders raise bigger rounds, spot when to be more aggressive on CAC and grow faster. With Covid-19 throwing the playbook out of the window, CFOs and Finance Directors at startups are more important than ever and could be the difference between a startup flourishing or struggling.
News is coming super fast right now and it seems the whole world is learning what exponential curves really feel like. Founders are having to think about so many things - the team, customers, investors and a thousand other things. A well prepared finance team is uniquely positioned to help founders see around corners and make better decisions.
Optimal actions change every day. To help out, we decided to put together a tactical guide based on some things we’re thinking about doing at Cledara. We wanted to share this to help startup finance teams to help everyone get through this as strong as possible.
Looking at data from the Dotcom Crash and the Global Financial Crisis, things were not as dire as the headlines make them out to be. Let’s check out the impact on startup creation, startup funding and spending on software by small business and enterprise.
The number of tech companies that were started in each of the last two major economic crises were flat, or, in the case of the financial crisis, actually were 30% higher after the crisis than before. This means that if you sell technology to tech companies, then your addressable market isn’t likely to change much, or may actually grow. This is especially the case if your software captures market trends – for example, during this crisis, videoconferencing and remote collaboration tools are doing really well.
In terms of funding, it’s likely that the changing behaviour from VCs in March 2020 isn’t going to stick around too long. Even in the Dotcom Crisis, funding rounds in 2001 were 20% higher than 1999.
In the Global Financial Crisis, funding rounds grew massively; the number of funding rounds were 74% higher in 2009 than 2007. Lots of research has linked this to action by Central Banks to lower interest rates (quantitative easing) forcing investors to look for yield by moving to riskier assets like venture capital. With Central Banks around the world taking similar actions to stimulate the economy by lowering interest rates in response to Covid-19, venture capital is likely to be a source of yield for investors once the impact of Covid-19 is more known and investors start investing again.
The other way to assess the impact is to look at how businesses changed their behaviour and reallocated resources during previous crises. Anecdotally, we are hearing that churn rates are going up and SaaS spend is going down as startups look to cut spending before cutting payroll expenses. Having said that, we’re not yet seeing that in our data and data from previous economic crises don’t support the belief that it’s likely to happen this time around.
There is no evidence that either the Dotcom crash or Global Financial Crisis had a significant negative impact on technology spending by either SMEs or Enterprise. Having said that, averages can be super misleading and it may be vertical specific. If you’re product is a tool to help remote collaboration (Slack, Zoom etc.), you’re likely to be experiencing a lot of growth right now as entire new customer personas look for products to ease the transition to remote working. If you’re selling technology to restaurants, physical retail or companies in the travel space, your experience is going to be quite different.