In the wake of disruption, smarter startup growth models are already emerging from the COVID economy.
Even before the pandemic, shrewd investors were questioning dominant growth strategies among startups, especially in the tech world. Too many relied on misleading metrics like user numbers, rather than focusing on building a solid revenue stream and plotting a clear path to profit.
Now that investment flows are starting to recover, the time is ripe to consider what healthy startup growth models should look like – and whether the crisis itself might, in time, help the whole industry build on a stronger foundation.
OPPORTUNITIES IN THE ROUGH
For some, the pandemic has opened new opportunities. Get My Slice, an app that pays people for their data by connecting them to relevant offers from advertisers, saw some dynamics move in their favour. It is a time of economic difficulty in which everyone is keen to earn extra cash, and they were able to negotiate good advertising rates. At the same time, a growth-focused investment round coincided with the pandemic going global.
“We were leading up to a fund-raise, working to have the product ready and tested and getting investor discussions going,” says Oliver Southgate, CEO and founder. “At the end of the [UK] tax year, around late March and early April, is when money starts flowing among private investors, so that is when we had the majority of ours lined up. Then everything just stopped."
Brands paused their support and investors adopted a wait-and-see approach. “You’ve put everything into getting to that stage and everything is pulled from you. It was horrible,” adds Southgate.
The company adapted by taking on opportunities outside of its original plan, such as moving into the cashback space rather than high-quality lead generation, its preferred model. This short-term compromise allowed it to stay the course long enough for investment conversations to re-start, which they now have, says Southgate.
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Some established companies have taken the long-term view by helping their clients. “Companies are restricted at the moment in putting costs on the bottom line, especially upfront, so we’re moving to a performance-based pricing model where we take on more of the risk,” says Thomas Gatten, chief executive officer of Growth Intelligence, a business-to-business marketing firm. The firm is also offering flexibility on long-term licenses.
Combined, these shifts have allowed the company to avoid losing any clients. “Companies are desperate for growth but can’t stump up large amounts upfront. We are able to offer them a risk-free way of scaling up their growth and they can use it at any scale,” says Gatten.
Future MBA courses will be written about the tactics used by today’s innovators to find new ways of bringing value to their customers, from Shopify’s cloud service bundle helping vendors with financial management and delivery optimisation, to Unmade, a British software company whose platform allows fashion brands to shift to on-demand manufacturing, accelerating a long-overdue shift from wasteful mass production to a smarter matching of supply and demand.
WHEN THE TIDE GOES OUT
The investment market is heating up, with stock markets rebounding and high-profile IPOs on the calendar, including Airbnb. Will this mark a return to business as usual, or are investors asking different questions? Oliver Southgate sees a different mood among investors.
“The conversations we are having in the last month, compared to December-January, have changed quite a bit. People are looking more at your risk strategies, at use-case scenarios in which you might fail. We are being grilled on this like never before.” Southgate credits his background in coding – in which “you expect everything to fail and figure out how to handle it gracefully” – to have prepared for these conversations.
In this more sober investment environment, capital might start flowing to companies with more solid fundamentals, with once-popular metrics receiving overdue scrutiny, especially in tech.
“The question should be not just how many users you have, but what’s the drop-off rate? What are you spending on acquiring them?” says Ifti Akbar, founding director of Fuse Capital.
A focus on unit economics and recurring revenue, as well as analysing risk profile, are better ways of evaluating a business, he says.
The growth financing landscape may be opening out. Conventional banks have long been weak at SME financing, especially in emergent sectors like Software-as-a-Service (SaaS). Perhaps their sudden transformation into business lenders at an unprecedented scale, as they hand out government cash, will expose them to more types of businesses and pique their interest in unchartered waters.
FUNDING GROWTH
Investment tools could also diversify. Venture capital has dominated the startup financing discussion, but other models are gaining traction. One is venture debt, which helps firms avoid the equity dilution of venture capital. This can work well for businesses with strong and predictable cash flow, credibility with clients and a desire to keep equity control.
Satellite company Rezatec took this approach to fund investment into sales and marketing without the downsides of venture capital. “This approach delayed the need for us to go out and raise further equity finance,” says Patrick Newton, the chief executive officer. “You might have financed this from an equity raise, but we wanted the revenue line to grow higher, in order to justify a higher valuation down the track.
Using venture debt means the equity route was not so impactful of terms of dilution.” Newton believes more firms are looking to take debt at an early stage, sometimes before the equity route. “Historically you raised equity finance, typically from a big-name financier and after, you would get venture debt on top. Over the last two or three years, venture debt has started to come earlier in the cycle, and even in advance of an equity financing round on occasion,” he says.
Fuse Capital’s Ifti Akbar says SMEs and startups are still getting familiarised with the model.
“Initially people struggle to understand how you can fund a loss-making business via debt, but there are many things you can look at, like intellectual property and recurring revenues, which are forms of security.” Venture debt can be useful for a business that is scaling fast and has discipline over the numbers, he says.
For the first half of 2020, most startups will have done well to stay above the water. For the second half, a return to growth is essential. The pioneers are finding new niches in a new operational era. They are being open-minded about their own business model, taking on opportunities that are not in their original plan, or looking at ways to help their clients stay on board by offering more flexibility and lowering risk.
Those who accelerate the fastest out of the storm will be the ones who built their growth proposition on seeing waves that were once on the horizon and have now rushed to the shore.
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