Investors to startups: Conserve as much cash as you can during coronavirus outbreak
Scot Wingo has been through several economic crises as an entrepreneur. But the coronavirus outbreak may just be the worst.
Wingo, who currently leads the car-servicing startup Spiffy, has led companies through the dot-com bubble, the 9/11 terrorist attacks and the Great Recession of 2008.
But “with this one you just don’t know how the dominoes will fall,” he said. “What happens if we can’t flatten the curve by the end of March? Could we be shut down through the summer?”
That uncertainty is leading the Triangle’s startups into conservation mode. After years of expansion and hiring sprees by hundreds of young startups, the Triangle’s startup ecosystem is emphasizing survival and cash to weather the coming economic storm.
Plan for the worst
“Absolutely” startups should be saving money right now, said Wingo, former CEO of the e-commerce software company ChannelAdvisor. “If you are a venture-backed company my advice is this is hunker-down time.”
That’s the same message many of the Triangle’s investors are giving their companies.
Jason Caplain, a general partner at Bull City Venture Partners in Durham, has told his portfolio of companies to plan for the worst.
“Make your cash last longer,” he said. “Things will get worse before they get better. Look for opportunities to manage cash. Consider delaying key new hires, minimizing non-personnel expenses, etc.”
John Replogle, a partner at Raleigh’s One Better Ventures and the former head of Burt’s Bees and Seventh Generation, is telling his companies to “cut extraneous spend[ing] and hunker down until the market returns to normal.”
And David Gardner, the managing partner of Cary-based Cofounders Capital, has told companies that fresh rounds of investment will be harder to come by.
“Our biggest concern besides slowing sales is follow-on capital,” he said in a warning to young companies that need fresh injections of cash to stay afloat. “Venture funds tend to slow down on new investments to reserve capital to protect existing ones.”
Ted Zoller, head of the Entrepreneurship Center at UNC-Chapel Hill, said many startups will need fresh equity to survive the economic downturn as customers hold off contracts and orders.
For the youngest companies, especially pre-revenue ones that are building a product, it will be “very hard to survive ... unless you have a committed investor who is willing to write checks,” Zoller said.
Both Zoller and Caplain said the government should increase access to short-term loans so startups and small businesses can pay their expenses while revenue slows down.
“Once we understand the spread of the virus and are able to slow the curve, business leaders will feel more comfortable about making decisions and planning for the near and long-term,” Caplain said.
To be sure, some companies are seeing upticks in their service or are finding their business model is resilient. For example, Caplain said, one of its portfolio companies, Maryland-based Attila Security, makes software for remote workers that has seen more interest from companies now managing a remote workforce.
Uncertain times ahead
Yet many will find turbulent times ahead.
More than 115 people in North Carolina have now been diagnosed with the disease, and COVID-19, the disease caused by the novel coronavirus, is beginning to spread through community transmission. Claims for unemployment benefits are now surging as efforts to stop the virus’ spread led to the closures of many businesses in the state.
Wingo, who also invests in startups, said he believes companies making consumer goods will be most at risk as physical retailers close.
At Wingo’s startup Spiffy, which does on-demand car servicing, many customers have already pulled back requests for service as work-related travel slows to a crawl.
“We have a bit of a double whammy,” he said. “We work with rental car companies and office parks — both of which are hit very hard from the travel industry and the work-from-home situation.”
After just closing a new funding round from oil giant Shell’s investment arm last week, Wingo is confident Spiffy will have the resources to make it through the pandemic.
But even companies that have brought in large rounds of funding, like Duham-based online payment software maker Spreedly, are continuously monitoring the efforts to slow down COVID-19.
“Right now, we are relatively unscathed,” Spreedly CEO Justin Benson said in an email, noting most of its customers haven’t changed plans yet. But “the situation is extremely fluid, so we’re looking at data on a daily basis.”
And companies that have yet to take a direct hit to their revenue are still approaching the pandemic with caution as its long-term consequences remain unknown.
“While revenue remains strong,” said Cole Johnson, CEO of The Looma Project, an advertising startup that focuses on grocery stores, “lengthening sales cycles have led us to exercise greater caution in our hiring plan.”
This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate
This story was originally published March 19, 2020 at 2:47 PM.
