*This is Part 2 of a series on how coronavirus (COVID-19) could affect startups – and what angel investors can do to maximize their chances of success. Click here to read Part 1.*

Earlier this week, we discussed some of the impacts of coronavirus (COVID-19) on the global markets.

You don’t need to be an expert – or even a trader – to see that publicly-traded companies are being pummeled right now.

Startups don’t necessarily experience the same daily fluctuations. There’s no “share price” you can look at to see how things are going behind the scenes. But that doesn’t mean private companies are immune to the impacts of the virus.

Still, all startups share a certain set of qualities that make them better-equipped to weather this storm than many publicly-traded goliaths… which means this could be a better time than ever to consider adding private equity to your portfolio of assets.

Let’s dig into this a little deeper.

The damage we’ve already seen from COVID-19

It’s only been a few months since coronavirus first spread outside the limits of Wuhan, China. But the economic impacts of the virus have already been felt by billions of people all over the world.

Some of the biggest companies out there – like Apple, Microsoft, and GE – are bracing themselves for the fallout of halted manufacturing, damaged supply chains, and closed storefronts.

Consumers aren’t just staying home, either – they’re also tightening their purse strings. The Dow is dropping on a near-daily basis; some folks near retirement are watching in horror as their 401(k)s lose value. In other words, buying the new iPhone isn’t exactly at the top of people’s minds.

I won’t sugarcoat things here. Many of these big companies will miss their earnings this quarter. Most will see their share price plummet. It could take months or even years for them to recover.

These same factors can and do affect many startups’ bottom lines – especially those that rely on overseas manufacturers. But when it comes to surviving recessions, there are big advantages to being tiny.

Startups have a unique ability to adapt and succeed in harsh conditions

When a gigantic company’s manufacturers in China shut down, that’s a big problem.

Take Nike, for example. They produce somewhere near a billion pairs of shoes each year – accounting for nearly 60% of its annual revenue. If their main manufacturing plants shut down for three months… they’re going to have trouble finding another that can support that same output.

Compare that to Allbirds, the startup shoe company that makes stylish, sustainable sneakers from merino wool. Allbirds sells a million pairs of shoes a year, give or take. It’s a lot easier to find a factory that can produce a million units than it is to find one to produce a billion.

What this really boils down to is agility. Most startups have pretty small needs in comparison to their publicly-traded counterparts – which means they’re able to move quickly in times of crisis.

This applies to overhead costs as well. Nike employs more than 75,000 people; Allbirds has less than 200 on their payroll. When a crisis like COVID-19 forces people to work from home, having a small, nimble staff is a huge relief.

New types of commerce are better suited to withstand pressure

The vast majority of today’s startups fall into at least one of these three categories: B2B (business to business – think enterprise software solutions); D2C (direct to consumer – like Allbirds, HelloFresh, Rothy’s, Bombas, Grove, and more); and software (everything from Airbnb to Slack and beyond).

That means well over 90% of their sales come from the Internet. They don’t rely on people showing up to shop at brick-and-mortar locations. Not only does this mean that they have a better shot of maintaining sales during a mass quarantine… it also reduces overhead costs substantially. And that means they can last longer with the cash they already have on hand.

So many startups already work remotely these days that I imagine a large number of them have been virtually unaffected by this crisis – at least in terms of business. Some companies are even seeing their sales grow right now. Software, meal delivery services, fitness apps and more are getting a boost as consumers hunker down at home.

Titans are born in times of strife

It’s a bit of a cliché, but it’s true: hard times make us tougher. And an economic crisis like the one we face now will certainly reveal which companies have what it takes to get through.

Think back to the Great Recession of 2008 and 2009. American households lost roughly $19 trillion of net worth in late 2008. The unemployment rate skyrocketed; the real estate market collapsed; and many, many people lost their homes and livelihoods.

Companies of all sizes suffered too. Businesses shut down every single day. It was truly a dark time, felt not just by Americans but by people and institutions around the world.

It was also incredibly fertile ground for innovation, disruption, and new hope.

Against all odds, visionaries from all walks of life managed to build businesses that grew into today’s biggest companies. Uber and Airbnb, for example, were both founded in 2008.

Github, Cloudera, Square, Slack, Dropbox, Glassdoor… these are all companies that took their first steps during the Great Recession. They were able to do so because angel investors like you and I stepped in with an infusion of capital when they needed it most.

Every single one of those startups ended up with valuations well over $1 billion. Some remain in the tens of billions, even today. Needless to say, they all produced life-changing returns for their earliest investors as well.

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Incredible stories like those are exactly why I believe that this is the perfect time to get started as an angel investor. I will say that doing your due diligence is more important than ever in times like these – but a startup that has what it takes to persevere through a global crisis might just have what it takes to join the “unicorn club,” too.

The key is having the right tools to know which deals are worth considering. Personally, I rely on the 1,000X Formula to separate the wheat from the chaff. It’s an incredibly simple, yet highly refined algorithm built upon my three core angel investing philosophies. It takes just a few minutes to use… and so far, it’s never let me down. Every single startup featured on the Angels & Entrepreneurs Network passed the Formula with flying colors. Just click here for more on that.

My advice? Be careful, stay safe, protect yourself… But don’t let your life come to a screeching halt. You might miss out on something amazing.

Until next time,

Neil Patel

Comments

4 responses to “Why Even a Global Crisis Can’t Keep Startups from Growing”

  1. When does a start up company goes public?
    Is there a time frame or a goal to reach for a start up company to go public? What makes the start up company decide to go public? This is the only part I don’t understand.
    Thank you for your assistance

    • Hi Angela,

      There are really no rules when it comes to an IPO. The time from founding to IPO has ranged from less than a year to more than 80 years! For the most part, companies won’t go public unless they know that the people of the public want to buy shares. That takes a certain amount of fame and brand recognition. Many companies decide to stay private indefinitely instead, though.

      Hope this helps!
      Neil

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