The economic impact stemming from the COVID-19 pandemic is, at this point, certain to have long-lasting effects. Social distancing, stay-at-home-orders, supply shortages, event cancellations and mass layoffs have rapidly created a new normal. Startups, which already operate in a volatile, sink-or-swim ecosystem, are learning to adapt.
For some D.C. startups, surviving and remaining successful has meant tightening purse strings and in some cases pivoting in order to serve customers at a distance. Meanwhile investors are reevaluating their risk appetite and largely shifting focus inward, to their current portfolios, rather than potentially taking on new startups.
Cove, a local coworking startup, closed all of its locations in mid-March, citing concerns for the safety of customers and staff. Not long after, D.C. Mayor Muriel Bowser ordered non-essential businesses to close. People who relied on Cove’s spaces to be productive suddenly had to do so at home. With Cove’s main service rendered impossible, the company launched a new service called [email protected] to continue serving its members.
“The beauty of technology is you can do it anywhere. The downside… is that you can become very isolated.”
The new service ships members monthly “Perk Packs” filled with specialty coffee, snacks, office supplies and other goodies that one might find in a coworking space. The service also offers curated furniture and equipment upgrades designed to boost members’ work-from-home experience.
“It’s just forced us to come together in new ways and reimagine ourselves and our mission in terms of enabling productivity and engaging the workday in a new way,” Cove CEO Adam Segal said. “The beauty of technology is you can do it anywhere. The downside of technology and laptops and the ability to work remote is that you can become very isolated.”
In an effort to preserve the community aspect of coworking at Cove, the company has been holding virtual social events for members, like happy hours. Some items that they receive in the Perk Packs are tied to the only events, as an attempt to encourage people to tune in.
The transition has largely been successful, Segal says. The company has kept “overwhelming majority” of its subscriptions, despite all its locations being closed. Segal says Cove has even been adding new subscriptions from companies that now find themselves with a new need to support a totally remote workforce.
This all isn’t to say that Cove hasn’t had to make cuts. While Segal says 100 percent of the full-time staff are still on board and “going full-throttle,” there is a team of part-time workers who simply haven’t had hours to work, since the locations are closed. However, Cove is starting to repurpose some workers to help fulfill Perk Pack shipments.
Other D.C. area startups have gone to launch entirely new products in order to stay afloat, stay relevant or to help people adjust to the coronavirus era. OurStreets, a relatively new app designed to crowdsource complaints about road safety incidents, launched a system to crowdsource where users are finding essential supplies at grocery stores. Arlington-based GoTab, a contactless restaurant ordering and payment system, ramped up its takeout feature and pushed out a delivery option within two weeks of restaurants having to close their dining rooms.
“I’m long on entrepreneurs. They’re fighters. So I think I think we’ll see some folks pivot, I think we’ll see some folks fail. And I think we’ll see some folks come out of this even better than ever,” said Allie Burns, CEO of D.C. venture capital firm Village Capital.
‘Watching every penny’
When social distancing and travel restrictions became stricter, cancellations were “staggering” at short-term rental property management company Great Dwellings, founder Karl Scarlett said. The company, which manages listings for vacation rentals on sites like Airbnb, fielded 150 cancellations in a matter of days.
But then some reservations started to trickle back in, which Scarlett attributes in part to State Department employees who’ve had to leave their stationed countries, and with nowhere but D.C. to wait out the crisis for now.
“Everyone realized they couldn’t come. But then we did start getting reservations from people who needed to come,” Scarlett said.
Still, the company has only been able to focus on the short term since reservations are happening on shorter notice, only looking two weeks out. Scarlett says everyone in the company knows the numbers they have to meet before making sacrifices.
“If we don’t hit that number are we gonna pay everyone? I didn’t have an exact answer. But I was thinking, say we hit 80 percent of the number, well we might have to do 80 percent pay in the next pay period,” Scarlett said.
Great Dwellings has also gotten much more conservative with its spending. Despite the broader circumstances Scarlett said he welcomes the leaner approach that the situation has forced Great Dwellings to take.
“These are things I kind of wanted before,” he said. “Watching every penny? Man, we probably should have been doing that all along. So it’s really just honed things that we were probably doing too loosely anyway.”
“If we don’t hit that number are we gonna pay everyone?”
In an effort to use its real estate resources for coronavirus relief, Great Dwellings set up a fund to pay for stays for frontline medical workers who don’t feel safe returning straight home after being exposed to the virus. The “Help Them Help Us” initiative is also an effort to keep money flowing to clients whose properties Great Dwellings manages as short-term rentals.
Hospitality is a difficult industry to stay optimistic in at the moment, with so much of the world on lockdown. Major legacy hotel chains like Marriott International and Hilton Worldwide have furloughed thousands. San Francisco-based apartment-hotel company Sonder laid off and furloughed hundreds. D.C.-based WhyHotel laid off a “significant portion” of its staff. Great Dwellings has managed to keep its whole headcount so far, Scarlett said, possibly owing to the fact that it’s a small team of fewer than 20 people.
Lean and nimble
Those on the investor and accelerator side have pointed to operating small and lean as a potential advantage in this turbulent market.
“One of the benefits of being an early stage or seed stage investor is most of our companies don’t have thousands of employees. The ability to manage through a couple of extra months of burn is great when you’ve got a team of six as opposed to a team of 600,” said David Hall, managing partner of the Rise of the Rest fund at D.C. venture capital firm Revolution.
Hall advises that companies be conservative with cash and not take revenue for granted at a time when spending in so many industries is down.
“I say to a lot of CEOs, this is the time for you to do your ‘control-alt-delete,’ orderly shutdown, as opposed to just slamming your laptop and running out of the door,” Hall said. “The advice that we’re giving to a lot of our companies is to really think about opportunities to preserve cash as much as possible, and don’t necessarily rely on revenue to be able to offset some of your burn, because some of that is being called into question.”
“Being nimble enables any organization from a multinational to a local, smaller startup to respond.”
Regardless of size, necessary adjustments to stay afloat amid the coronavirus are pretty much universal. At SEED SPOT – a non-profit that runs accelerator programs with a social impact focus – fledgling startups in the midst of the accelerator program had to completely change their business strategies to survive.
“There have been significant changes to some of the cohort members’ short-term business models to make sure that they’re pivoting. The benefit is that they’re nimble,” SEED SPOT CEO C’pher Gresham said. “Being nimble enables any organization from a multinational to a local, smaller startup to respond.”
To help guide the entrepreneurs it supports as they try to stay afloat, SEED SPOT has had to retool much of its programming to focus on how to pivot.
“Previously, it was very focused on only new ideas. Now we have different curricular pieces for new ideas and different curricular pieces for how to pivot your business in this new world of how to work virtually,” Gresham said.
For SEED SPOT itself, having to go virtual hasn’t stopped it from continuing with most of its programming. Large, in-person events planned in March were set up as online events within 48 hours of occurring. This month, SEED SPOT hosted a demo day via livestream as a culminating event for its D.C. Impact Accelerator, awarding $25,000 in prizes. One thing that SEED SPOT did have to put on hiatus is a launch camp in the U.S. Virgin Islands that it planned to run last month, due to technology accessibility concerns. SEED SPOT@seedspot
The next round
The ongoing crisis forebodes a period of major funding slowdowns for startups that depend on venture capital investment to grow. Some local VC firms have started to focus their attention on startups they’re already invested in rather than expanding their portfolio.
“We’re really focused today on the existing portfolio – making sure that all of those companies have those contingency, have that capital cushion, that can be needed to continue operations,” Hall, of Revolution, said
That’s not to say investors aren’t looking at the opportunities on the horizon that will pay when the world returns to a sense of normalcy.
“After the resolution process begins with the crisis, I think there are some really strong opportunities for investors to find really good businesses that are solving some needs that have been exposed through this crisis, through things like supply chain issues or funding gaps,” Hall said.
“There is definitely a sense of a bigger hill to climb.”
Burns, of Village Capital, echoed that sentiment, suggesting that while risk appetite is probably dropping, investors might find the next big thing in a startup looking to fix societal cracks exposed by the coronavirus crisis. Village Capital focuses on impact investing, meaning it tries to support startups that aren’t just profitable, but are solving societal problems.
“I think it reinforces the importance of the sort of drum we’re always beating, which is about investing in more people, places and problems,” Burns said. “If we don’t have investment in innovation that’s coming at the early stage in solving some of these big systemic challenges that I think have been spotlighted in this crisis, I think we’re missing a real opportunity to become more resilient to the next crisis.”
Still, in the more immediate future, early stage startups are starting to feel the slowdown, in terms of revenue as well as fundraising potential.
“There is definitely a sense of a bigger hill to climb,” Burns said. “There is starting to be a set of companies who may have been actively fundraising or who were thinking about getting out there and raising their next round, who are hearing from investors that are starting to slow down. … Unfortunately, in a few cases, some investors have said, ‘Look, we’re actually not going to be able to participate in this round.’”
Burns remains optimistic that new, previously unconsidered investment opportunities will come to light now that everyone is interacting virtually. Moving things forward in the startup world has traditionally relied on face-to-face interaction, which contributes to the fact that a majority of VC investments go to Silicon Valley, New York and Boston. Both Burns’ and Hall’s firms try to eschew that trend.
“Funding is inconsistent when it comes to diverse entrepreneurs and entrepreneurs who are sitting inside the coasts in part because of this insistence on in-person interaction,” Burns said. “And I hope that the increasing realization that there is a lot of interaction that can be done without connecting in-person will help open up investors’ eyes to opportunities that aren’t physically down the street from them.”