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The impact of COVID-19 on tech start-ups and how they can prepare for a post-lockdown world
The COVID-19 pandemic has devastated the short-term business environment. In the space of a few weeks, many companies globally have gone from counting their profits to worrying about survival.
But how has the coronavirus pandemic affected the most vulnerable businesses in the technology market; start-ups? How will it impact future cash flow, investments, innovation, speed to market and talent attraction? And what can tech start-ups do to get ahead of the competition when this is all over? Matt Holmes, Head of Technology at Gattaca, explains the top 4 trends impacting tech start-ups right now, and how to get ahead of the curve.
1) Impact on cash flow
For tech start-ups, profitability and cash flow are very different considerations compared to huge multinational and established organisations such as Microsoft or IBM, which are able to weather storms such as coronavirus.
By their very nature, start-ups will have already invested a lot of money in setting up their business and getting their portfolio of products to market. With the impact of COVID-19 hugely influencing their growth strategies, many will now be closely monitoring their ‘burn rate’ as they plan for the future.
Founders are faced with the hard decision of investing more to get their ARR (annual recurring revenue) to a level that will attract the next round of investment quickly, or working through their business plan to reduce costs and break-even.
Due to the impact on cash flow, many startups are being forced to either self-fund, make redundancies, furlough, make other cost savings or use the government’s investment funding scheme to help.
2) Funding decisions impacting new product innovation
There is a delicate balance at play for many CEOs/CFOs of tech businesses.
On the one hand they want to ensure their products achieve their potential and are well-positioned to succeed in the current and future market environment. On the other hand, the unknowns will be causing them to question how much to invest in innovation whilst the economy and their cash position is so vulnerable.
Traditionally, budgeting decisions for many tech start-ups and growing tech companies will be based on the performance of their portfolio of products. Right now in this very different world, product performance cannot necessarily be trusted as a sign of future potential.
A further consideration is the restriction surrounding funding. Government funding is likely to include rules and restrictions; will these enable tech start-ups to be daring, brave and entrepreneurial for future innovations, pivots and general operational business decisions?
Likewise, if CEOs, CFOs & business owners instead look to fund themselves, they will have greater control, but is this too big a risk to take in these unprecedented times with still no light at the end of the tunnel?
3) Changes in investor behavior influencing the speed of new products to market
Now more than ever, investors will be less inclined to opt for high-risk, high-reward strategies, and instead favour more stable, long-term rewards. In other words, they will opt for a ‘Warren Buffet’ strategy, whilst desperately avoiding the ‘Neil Woodford’ approach.
Some venture capital firms have also started looking at cash conversion scores as a new metric to see the health of the business. This may form a more integral part of investment decision making than it ever has done before.
These shifts in investor attitudes are likely to reduce the number of new tech startups coming to market, which may have an adverse impact on speed of new products to market.
A change in the sales dynamic will also undoubtedly bring fresh thoughts to how investors evaluate and decide on who and how much they will invest in. For example, SaaS companies targeting SMEs will likely see an increase in customer churn, as businesses across all markets adjust to the decline. SaaS companies targeting enterprise-level business may find it much harder to achieve new logo wins and will likely focus on upsell opportunities instead. In either case, the sales approach will need to change, which may affect investor decisions.
4) Impact on hiring tech talent
As any owner of a tech start-up will know, you’re only as strong as the individuals in your business. Attracting, engaging and retaining talent is therefore as important as ever.
A recent Indeed report showed that, whilst the volume of live tech jobs in the marketplace has decreased by 35%, demand has not fallen of the face of the earth compared with other sectors, such as hospitality, which showed a 76% decline. With this in mind, many tech companies are taking stock, rather than completely changing their hiring plans.
As tech talent is crucial for mobilising the workforce, enabling remote working and creating new technology to get around the COVID-19 pandemic, roles such as Desktop Support Analysts, Data Scientists and Front End Web Developers are weathering the storm. In certain industries, such as healthcare and education, there has even been a spike in demand.
Despite this, the prevalent force of uncertainty has meant that the jobs market is less fluid: companies are more hesitant to invest in headcount, whilst many candidates will feel fortunate to still be in their current role, and therefore not be looking to change employers. This has a particular impact on the hiring ability of startups or newer companies, who may struggle to offer the job security of larger or more established tech businesses.
When the time is right to invest in headcount, it will be important for tech start-ups to be ready to get a good start out of the gates, or otherwise risk losing out to their competitors.
How tech businesses can prepare for post-lockdown surge
Whilst tech start-ups may not be in a position to hire right now, they can certainly look at improving their recruitment processes and getting ready for the war on tech talent that is to come.
Discussing plans around ‘return to work strategies’ and how to leverage the current situation to secure top talent post-lockdown and ahead of the competition, should be a key discussion point between CEOs, CFOs, HR Directors and their recruitment partners.
Having an agile tech recruitment specialist behind you will enable you to strategically position your business, scale-up and hire with accuracy and speed. This will make your tech startup more competitive in a post-lockdown world.
At Networkers, we’ve already started several projects helping companies tackle COVID-19 and beyond in the UK, Europe and the USA. We believe there are many more companies out there that need to prepare for the post-lockdown ‘sprint’ by using this time to their advantage.
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