Risky Times For Startups – What To Do?

Over the past 20 years, I have had the pleasure of seeing the Zurich high-tech startup scene evolve from virtually nothing into a vibrant ecosystem of increasing importance and success. Over the years, I have also been involved in a number of technology startups myself, as a co-founder, board member, senior technologist and business angel, and I have remained close to former students who have built their own companies.

Well, we are not yet San Francisco or Tel Aviv, but there are many examples of ‘high-tech nuggets’ – mostly from ETH alumni – that have made a successful exit through acquisition by some of the biggest international technology giants. This evolution requires a careful interplay of international excellence at ETH, willingness to transfer research into products, venture capital infrastructure and the implantation of entrepreneurial spirit into our students. 

This ecosystem is now really at risk because start-ups are designed to grow fast or die. Covid-19 has suspended and even killed the business model of many. Take, for instance, a startup operating a platform for travel/vacation/leisure services: it is not difficult to understand that this business is not flourishing at the moment. If we think it through, we find many more examples of once promising companies that are currently in deep trouble.

Second, a startup always needs money. Investment, in particular at the early stage, is provided by friends and family, business angels, family offices or early stage VCs. With the stock market plunge and the financial damage already horrendous, investors will inevitably become more risk-averse and reduce the high-risk positions in their portfolios. This has been confirmed by various VC and family office colleagues. Even VCs with full funds that need to be invested will become extra careful and will have a much broader offering from which to choose. They will also use the crisis to weed out some of those that are struggling from their portfolios. There are estimates that 50% of startups will run out of money over the coming six months, and up to 80% of fintech, marking the end of the over-hyped blockchain technology.

This all comes on top of the general risk-averseness of our culture – as opposed to our counterparts in the US. It is furthermore not clear what shape the recovery curve will take – i.e. how fast human behaviour and thus financial markets will return to a pre-virus state. 

My fear is that the local recovery rate for the Zurich startup ecosystem will be even slower than in other places. This means that for a startup it will be absolutely vital to have a healthy runway. Here are the four things that I recommend to all CEOs:

1. Use the time to keep conversations going with your network of investors. It is a common mistake to believe that you need to talk to them only when you need money. It is very important to build relationships early on such that a later stage investor knows about your company and when the time is ripe will pitch in. Note also that they will all be working from home right now and potentially have more time for you than pre-crisis. 
2. Go over your books and try to limit your burn rate. Renegotiate fixed costs and think deeply about the core team that you really need at the present moment – and don’t focus overly on deep technology and development. The most common mistake made by ETH-type high-tech startups is to underestimate marketing and sales. It might be rooted in a certain arrogance of us computer scientists, but be aware that marketing is both a science and an art, and even more so when building up successful sales networks. The most sophisticated technology does not help you if you run out of money.
3. Adjust your business model and pivot it to b-to-c where possible. I know this is hard, but not all startups are suffering during the crisis. Companies in some areas such as AR, telemedicine, telepresence, online learning, remote work and gaming are thriving amid the virus. Many online direct-to-consumer businesses are actually going up (look at Farmy for non-tech) and I can give you two examples of startups I know: Nanos, a company offering AI-driven online marketing campaign optimization and which recently went for an international sales partnership model, experienced a surge in revenues after the sales partners adapted to the new realities of Covid-19. It has focused sales on online businesses and those that can adjust business quickly. The second, Arbrea Labs, which builds b-to-b software for surgery planning for plastic surgeons, is working on a b-to-c solution that will go straight to potential patients – thus bypassing the current lockdown of plastic surgery. So, creative thinking is essential.
4. Explore governmental programs to support SMIs and startups, and try to get help. It is clear that short-time work (Kurzarbeit) is not the ideal solution for a startup, but it can help to alleviate short-term financial bleeding. Different programs are available at both cantonal and federal levels. Organizations such as the Swiss Entrepreneur’s Foundation may offer advice and support. Unfortunately and not understandably, many of these funds give only credit lines, but if you run out of money you may be glad to accept a loan with acceptable conditions.

So, overall, we are still living in surreal times – in a time that bears substantial risks for startup entrepreneurs and has the potential to kill much of the ecosystem we have built. But in each crisis there is also opportunity.

My advice to all entrepreneurs is to be proactive, creative and try to seize the moment to pivot.

 My appeal to the government is to create a CHF 1 billion fund to invest and take stakes in those promising startups that are suffering.

And to all investors to continue to remain believers in the ingenuity and creative powers of our high-tech startup scene and to continue to take risks even in the face of losses. They will be rewarded after the crisis more than ever before.