by Frederic Kerrest
July 30, 2020
by Frederic Kerrest
July 30, 2020
The COVID-19 pandemic has had significant ramifications on the economy. One survey found that because of the virus, 31% of small and medium-sized businesses had to close down completely, and 41% of owners had to dip into their personal savings to stay afloat. While these numbers sound grim, a downturn can actually be a great time to start a new business.
In the coming months, we’ll see a lot of disruption, dislocation, and new opportunities. Entire industries will be reinvented, and 3-5 years from now, we’ll rely on new services and products that we can’t even fathom today. This week on Zero to IPO, we talk to Ann Miura-Ko, a cofounding partner at Floodgate, and Lisa Gelobter, the CEO and founder of tEQuitable, about what it takes to start a successful company during an economic downturn.
Entrepreneurs who want to build a thriving business during the COVID-19 pandemic should focus on solving a persistent problem. If these founders succeed, they’ll create an entirely new category, which is just as important as your product, culture, and team.
Gelobter is creating a new category with tEQuitable, a platform that helps companies address bias, discrimination, and harassment in the workplace. When she tells people about her product, she says they wonder where it’s been all their lives; it’s a solution to a problem her customers previously thought was unsolvable.
Miura-Ko, whose venture capital firm also created its own VC category, says you know category creation has gone right when you see an explosion of similar types of companies. Her advice for category creators is to position their business as more than just a static set of services—instead, make it a dynamic offering the customer can build on. Doing so will allow customers to integrate your product into their company and make what you do essential to their own business.
Once you’ve identified a category-creating business idea, you need to prove to investors and potential customers that the value of your product can outlast economic swings. When my cofounder and I pitched the idea for Okta to investors in 2009, we made a bold prediction that companies, several years in the future, would rely on myriad SaaS applications and would need a way to provide secure access to users. It sounds obvious now, but back then, the cloud was just taking off and it wasn’t something everyone understood. Our pitch strategy was to outline that future and illustrate that we were the ones to make it happen.
Miura-Ko says she and her team of investors are looking for founders who are living in the future. They want entrepreneurs to show them what the future will look like, what is needed to get there, and the immediate first steps.
Proving your vision to investors is important, but funding will be hard to secure during a downturn. According to Miura-Ko, that means startups should shift their focus away from fundraising right now. The most successful startups she encounters at Floodgate aren’t the ones that rely on their investors. Instead, they are antifragile companies, which means they don’t just survive challenges but thrive because of them.
Antifragility is especially important right now because we are living through one of the biggest challenges—economically, logistically, and socially—that we’ve seen in decades. To develop an antifragile mindset, Miura-Ko says you need to shift your goals to long-term survival. Many startups orient their entire business plan around raising their next round, but that approach won’t work right now. Instead, Miura-Ko says founders should work on being lean and outlasting their competitors.
However, this advice might be easier said than done; investors often pressure their portfolio companies to burn cash quickly and get to the next round. This misalignment means startup founders need to be ready to stand their ground and push back, just like Gelobter did at tEQuitable when her investors urged her to “set cash on fire.” She opted instead to take a slow and steady approach toward profitability. This strategy paid off because tEQuitable is now well situated to survive any recession.
Founding a startup during a recession is tough, but the entrepreneurs who do so successfully will build strong, antifragile companies. If your business idea solves a persistent problem that doesn’t have an existing solution, and you’re able to focus on long-term growth instead of short-term fundraising, you’ll be well equipped to thrive in the long run.
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