Startups are in way better shape than traditional small businesses.
By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.
Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased operations overnight.
My friends and family in startups are doing fine, for the moment. It's those that chose to work at the more stable, traditional work environments that are getting wiped out, and much less likely to return when the economy starts back. Because when it does, there will be money ready for investment - extending your runway to get there for a startup is more straightforward. But when you're a bigger business with little cash and no-one is buying assets right now, you literally are unable to make any decision to help.
I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.
This strikes me as wishful thinking and also incredibly myopic about the realities facing many startups.
A startup that recently closed a big round (and the need to close the round wasn’t necessitated by massive debt or existing expenses — so think almost all of the money can be used as future runway) might be in a better short-term position than a business that is relying on net-30 or net-90 payments from clients that might not come and that will struggle gaining new revenue needed to pay bills. This is especially true if the startup can pause or slow-down hiring for now to extend the runway — but that’s a short-term advantage.
Longer term, there is absolutely nothing inherent to being a “startup” that will make it any better at weathering the future than any other type of business. And when investments come back — and it could take years, we just don’t know at this point the extent of the economic situation — it is the biggest/best-connected that will benefit. Plenty of startups won’t ever be able to raise that future round. Plus, they get the additional disadvantage of trying to figure out an actual business model during a recession. At least existing businesses — even if they don’t survive — had a working business plan in place first.
> I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.
This is the only part I agree with. I don’t want to see any business fold — but I’m much more concerned about people who aren’t venture-backed founders right now.
> I’m much more concerned about people who aren’t venture-backed founders right now.
I'm sure most bootstrapped founders are ecstatic that their competitors who have been dumping product at below cost for years are now mostly going out of business. Not seeing much complaining on Indie Hackers.
> And when investments come back — and it could take years, we just don’t know at this point the extent of the economic situation
Given unlimited QE and huge rounds of fiscal stimulus, the financial markets in major developed countries with debts denominated in their own currency are unlikely to suffer for too long.
Once there is a glimmer of hope that Covid-19 will likely be contained or its effects significantly mitigated, the flood of funds seeking yield should start to pour into discounted assets and other investments with good risk-reward ratio.
Looking at Germany and South Korea, mitigation through concerted efforts should be possible within a year or less. Pessimistically, if containment and mitigation fail, the population will have herd immunity by 1.5-2 years.
> Longer term, there is absolutely nothing inherent to being a “startup” that will make it any better at weathering the future than any other type of business.
I think the assumption is that "longer term" is "within your runway" for some set of startups. Early stage startups can have years of runway.
If you're a startup that's recently closed an amount that will carry you through this period I think you're probably in the ideal position. There is an open and obvious question as to how long that may be, but if you have multiple years of runway it feels safe.
I'm not sure I buy this. 80-90% revenue declines across many industries is unprecedented. Especially in cases where poor operations didn't impact the business. Businesses like Hilton or Disney that have operated for 100 years may go bankrupt (not out of business) before this is all over.
Hilton may go bankrupt but Disney won't, they've been quite successful at diversifying their portfolio and I'm sure their streaming service is doing quite well. They recently announced that at least one of their upcoming movies will skip theatres and go directly to their streaming service, while others theatrical releases are being pushed back.
This allows certain parts of their business empire to fund the less performant ones e.g. adventure parks. Hilton has no such option, they're quite invested in the hospitality industry which leaves very little room for pivoting.
Yes, I mentioned this. I’m just saying that a large drop in revenue right now doesn’t necessary correlate with a product that people generally want or is useful.
Right but they didn't result in Hilton / Disney having 80-90% revenue drops overnight. This is a very unique contraction. Even in the depths of 2008, DisneyWorld still had a steady flow of visitors, and Hilton hotels across the world still welcomed guests.
This is rather worse than your typical 8-year contraction. Like, experts aren't sure if it's going to be better or worse than the Great Depression and they're not optimistic based on what we've seen so far levels of bad.
Yep, if your startup plan has a good chunk of the budget dedicated to "how does the business survive global thermonuclear war" you are wasting money, time and focus.
Assuming a "tech startup".
d) Little to no costs with many-month wind-down period. A lease contract for a restaurant or shop might be 1-2 years, and one is still on the hook for that despite 0 income due to closed shop.
I think both your and the parent's perspectives are correct for different startups.
I don't think life is going to change much for pre-revenue startups still trying to find a market fit. Now, they're back to square one working out if they've got a product that can be sold somewhere.. anywhere! Uncertainty continues as usual.
But if a startup had a fit and were marketing for growth, well.. sucks to be them, unless they were in some kind of remote-collab space.
Comparing startups against small/mid-sized businesses is like comparing a lion cub against a house cat. People see them as the same when they look like they are equal, then their paths quickly diverge when/if growth kicks in.
Many, many businesses are suffering in some way, and startups are not impervious to it either - a major question is who is able to suffer through this longer in order to come out the other side alive. The advantage of startups here is that they have more direct “supply lines” to capital to “hold out through the winter” whereas businesses relying on government help and bank loans are not in as good of shape to survive when depending on indirect third-party capital.
Long-term, this sucks the most for non-venture backed companies if they can’t hold out and die, or make it through and are hampered with debt so much that they are handicapped from returning to normal for quite some time. Conversely, I think this is where investors and venture-backed startups will see an opportunity to thrive because they could easily “sink the damaged ships” and corner markets in a new wave of cheap M&A deals and market share growth.
It's myopic because the commenter is usi g their own circumstantes (i.e. anectodal evidence) to make a broad statement that startups are fine right now. Great for OP that their circle of friends at startups are unaffected but it is indeed myopic to extrapolate that to the entire startup scene being fine.
You weren’t around in 2000 or 2008 were you? Your startup is only in “better shape” as long as VCs are willing to keep funding you. VCs are only willing to keep funding you if they have confidence that you will have a profitable exit.
A friend’s medical practice will implode April 30... their business is down 90% and they won’t be able to
pay rent or the employees. They are only staying open in hope for some sort of aid or debt jubilee. The partners will lose pretty much everything.
People with cash aren’t going to keep plowing money into startups, they are going to buy depressed assets. Every leveraged real estate company will be broke in 90 days or less.
Governments (like the UK here) are trying to borrow then lend money to business like that so that at the other end of this, they can just return to normal.
But honestly I think it's too complex to attempt. Perhaps some form of managed debt jubilee will work "no rent for six months" or something. but the unintended consequences will be huge.
Good luck to your friend
Edit: we should probably focus on the areas that can be easier made whole - finding landlords with extant contracts and just paying them for the contract will be easier than getting their tenants paid, finding businesses with employment contracts easier than paying individuals...
This crisis is hitting medical practices incredibly hard, given that all non-emergency procedures are canceled (by law where I live). You seem to be implying by saying "cosmetic surgery" that it's just personal, cash-pay procedures, but that's totally wrong. Primary care, pediatrics, radiology, sports medicine, dermatology, on and on - they're all getting killed by this.
Shelter in place means shelter in place -- almost all non-essential procedures have stopped, where "essential" has varying degrees of severity depending on where they are. I personally know of cardiology, oncology, and internal medicine groups who have basically cut their businesses by 90% to keep people at home. It's not safe for their staff or for other patients to continue normal operations.
At least where I am (Australia/New Zealand) I have been hearing that GP visits are way down. I think people are trying to avoid the health system as much as possible and are therefore putting off any appointments that are not critical.
Too many people haven't lived through hard times. They think that rules exist and they know what the rules are. The other day I was describing to a friend who has a company that will need funding in about 6 months, in a conversation where I was imploring him to cut his burn rate, about how things can go.
In 2001, VCs actually pulled back investments from startups. People think that once cash is in the bank it's theirs.
Not all startups require VC capital, some of us are just running without venture funding just clients money, some startups are in better shape because are on right market on the right time. You just need to be in the right time.
Right now, client funding is extremely vulnerable. The startup I was working for in 2001 blew up when clients stopped paying bills due to their own bankruptcy. The one I was working for in 2008 was badly crippled by all the clients we were pre-sales engaged with simply closing their external purchasing.
This is the thing I've seen a lot of tech people missing, they are all "I'll be fine, my company already works from home and our business isn't effected". Yes, but what about your customers businesses? What if they stop paying? Or what about _their_ customers. The entire economy is going to be hit hard, and that will ripple through.
I think startups that cater to providing services to government funded organizations will probably do better, especially with all this new government debt globally in the form of "stimulus".
I don't expect that will turn out to be the case as funding will be reallocated across various government programs in an extreme manner. The impact of Hurricane Katrina on DHS programs is a comparatively small example of what can happen after an event like this.
Companies large enough to serve multiple different organizations may be able to re-balance their services.
Yeah I have a friend who works for a small company (although not a startup) that provides essential services to the government, we think he's as safe as anyone.
And you’re probably not looking for a large exit. You are trying that unheard of concept of spending less than you make. What you are doing is running a “lifestyle business”.
That’s not a negative despite what the tech bro’s think. I hate the idea of success for a company seems to be “we got another round of funding while losing money”.
The term "lifestyle business" really annoys me. It's Silicon Valley propaganda. There are better ways to build companies than taking hundreds of millions or billions in funding. Pre-crisis startup funding was largely decadence enabled by cheap money.
By contrast early generation SV companies took relatively small amounts of funding if at all. Intel for example took the equivalent of $18.4M US in 2019 dollars prior to IPO. [1]
I gave that a lot of thought lately. Not that I wanted to, but being a one-man bootstrapped startup kind of let to it.
And with all the stories coming out of Berlin's scene, and to a lesser degree Munich's, I came to the conclusion: "lifestyle businesses" businesses without external funding are hard. They are traditional small companies, the have to rely on positive cash flow, profitability and banks to keep running. Quite tough, especially if the founder and employees have to actually live from the profits.
Startups on the other hand, they life of VC money. As long as the founding team can sell their vision to VCs to get more VC money, they run just fine. So the founders can live the startup life with other people's money. Sounds more like lifestyle businesses to me.
The thing that annoys me about "lifestyle business" is that it also suggests this idea of short days, tons of vacation, etc. Which is usually not the case.
Honestly I think it’s a way for those that owe million to VCs to feel like they have one over us businesses that grew at a healthy pace, have money in the bank, and money in the bank goes up not down every month.
At least that is how lifestyle business is slung here. No one in my local business association would scoff at businesses growing at a healthy pace and no debt. Also nice if no VC gives me another round, I don’t have to shut down tomorrow.
Yes. However it can also be pitched as there's no big upside and the salary is so-so but it's a "lifestyle business" even though the hours and other time-off are nothing to write home about.
I'm the CTO of a "lifestyle" business, though we don't really call ourselves that. Salaries here are excellent for our area (MN). Time-off is better than average, and we have free worldwide flights for vacations as a perk. Highly flexible work hours and location - we have some FTE's 100% remote, living in other states; I'm 90% remote. No overtime culture, no death marches. Maybe every 2-3 years we have a couple weeks of a good crunch but it's with buy-in from everyone doing the crunch.
We're lucky to have a customer base that spans many industries. We've lost some chunks of income.. chains of malls closing, restaurants, lobbies, DMV offices, customers getting live sports info.. but it's all temporary and we're well in the black. Instead of worrying if we'll make it we're looking for opportunities and how we can best take advantage of our strong position.
That sounds great. A lot of the time "lifestyle" businesses for the owners (in the sense of control, no outside investors, etc.) doesn't trickle down to the employees in any meaningful way though.
I feel the phase means something different entirely - let's say I start a software consultancy with my friends, and my goals are to run the firm how I want, be my own boss and that we have fun working on interesting projects together.
That to me is a lifestyle business.
If there is a profitable decision I could take, like investment / partners / whatever, I prioritise the fact that I want to keep running this company myself without interference over profit. I prioritise my job satisfaction.
Maybe I could hire a more competent CEO, but that's not what I am trying to do here. I could get a mentor thou.
This business could be funded by debt, or investment, though not normally.
Now I might make a lot of money and grow the firm to 10k people, or I might take long holidays and go bankrupt - that's a different problem entirely.
> Pre-crisis startup funding was largely decadence enabled by cheap money.
Arguably with current rates we are going to have cheapest money ever possible. On top of that a lot of traditional investment vehicles are contracting.
It's a fair point but I think that the key issue is different. VC funds are a kind of equity investment; the question is whether they are actually delivering results. In the case of some of the top-notch US funds I would guess the answer is yes and will continue to be so.
On the other hand large funds like SoftBank are clearly under-performing. Cracks in that model were already appearing prior to Covid-19. So yes, interest rates are low, and equities should benefit in general. However it does not follow that VC investment funds are overall a good bet. To make that argument you would have to trade off against alternatives like real estate, more traditional industries, on-shoring of supply chains, etc.
Not necessarily, a startup could be boot strapped by founders themselves, and they might prefer to keep it a closely held operation with minimal third parties adding pressures. They might still be looking to cash out, just on different terms.
Its hard to find investors if you aren’t interested in hyper growth. The financial risk that the company will go out of business is the same but the expected returns are a lot lower. That just doesn’t make sense from an investors standpoint from a risk/reward vantage point.
there's a big gulf between "lifestyle" and "SV big startup", like startups that aims for 1.25-2x growth per annum, has taken fewer rounds of funding. There's several of them in SV, too.
Absolutely true — but the GP point about startups being “better prepared” because they already have runway and expect zero revenues (an opinion I wholly disagree with), doesn’t apply if the startup doesn’t have funding. As you say, a lot of this is about timing (and I’ll add, luck plays a massive role here too).
That's just a small business - the comment above is referring to companies with a huge VC cash raise in the bank and "runway" as being in a better position than companies like yours that rely on cash flow from customers
Not to mention VCs becoming more risk averse — not wanting to throw good money after bad. So not only does it need to be a profitable exit, it needs to be profitable at a good multiplier compared to every other business seeking investment.
VCs were always 'risk' averse, though this manifested in odd behaviors. Such as the herd signal, whereby one investor decided to invest attracted more capital.
One might argue that the signal indicated lower risk, but this runs at odds with the mission to find potentially large payoffs. That is, derisk enough, and you de-reward. Add to that, that there is no "sure thing", or ultimate de-risk. There are no silver bullets in this process, and signals you think may indicate one thing, actually indicate something entirely different.
This. I was in a fintech/payments startup that actually survived the initial 2000 tech crash... had found product-maket fit and were closing major customer deals with Banks . But we still substantially cash flow negative (payment networks are great scale economy business but take time to ramp) and in process to raise another ~18 month runway... when sept 11 hit. After which all funders dried up. Years later, that same product we built did become hugely successful, under new ownership. This after the startup was sold in a firesale and all founder/employee equity was wiped out and everyone laid off. Not that unusual a story in startup land, but one were going to see more of this year. Weak business as well as viable ones, all thrown out with the bathwater when a severe economic shock hits.
The markets present an even more compelling opportunity for high risk return at the moment.
I'd argue that VCs (being opportunists at heart) are very likely to redirect funds and shun startups for a while e.g. likely as long as post tech bubble timeframe.
How many companies are running with no VC funding that fit the profile of the parent poster?
“By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.”
“months” is a vague term here. You have two months funding? I have some very bad news about what the world is still going to be like in two months time. Six months? The news is still not going to be great. You have a year of funding? OK, now we’re talking. And even then we’re talking cautiously.
The economic fallout from this is going to be huge. And if you think tech startups are immune to that you’re in for a shock.
I work for a well funded + product + paying customers + whatever su. Since inception of covid-19 the vast majority of customers withheld pretty much everything (some violated signed contracts). Some are MIA and impossible to communicate with.
It's a global turmoil and it's too soon to make assumptions about how great of a shape we're in.
This. I had revenue for 5 people but didn’t succeed to find them, just 1, so I feel very well off and I keep the positions open. However, we’re on a corporate market that errs in the side of luxury, and even with an incredibly safe runway, I can’t assume I’ll still have customers in one year...
Let's circle back in six months and see how you're doing. Things still feel nice and full when you've had a nice big dinner. But give me several lean days of no breakfast and meager lunch and dinner and you'll see just how full you feel.
Startups are not in any way, shape or form, "better" than any other traditional business. In fact, maybe worse.
Our board and investors have made it clear they think it's highly unlikely any meaningful funding will be able to progress until early 2022 at this point.
Recently-funded or reasonably conservative startups should be able to do okay with that, but ones without a lot of runway are going to be in a really difficult position.
Your board and investors clearly have an exceedingly high regard for their own predictive abilities if they can anticipate the reaction of a specific financial sector two years hence, based on the effects of a crisis that's realistically about 3-4 weeks old.
I'm not saying they are wrong. But the premise that anyone has a fucking clue what's going to happen on what timeline is ludicrous.
Well the money doesn't flow in as long as they think it. Which will last however long they want it to.
When you get old and wizened you'll notice the pattern whereby the VC investor types will express the same certainty about everything all the time, even when shifting their opinions 180 degrees regularly and pretending like they've held their most recent opinion the whole time.
Did your investors give some justification for the 2 year time span? For example, did they account for the possibility that many business won't open until September, or a second wave of infection that will hit late fall, followed by say, recession in full swing all of 2021.
It's known that some businesses won't open until September - that's the current target for sports stadiums, for example.
Even after September, there will be a lot of unknowns with massive economic implications. Will cruising recover in 1 year, or in 10 years? How much more friction will there be on international travel, and for how long? What's the risk of a coronavirus resurgence, both globally and locally? How different will the new crop of small businesses be from the ones that got eliminated in the shutdown? If you're going to give a startup huge chunks of cash, you need a high degree of confidence in the mid-term future, and in most areas that won't be available for a while.
I hope cruising only recovers with big reforms including:
* Cruise firms pay their taxes and aren't allowed to use flags of convenience
* They're required to look after and pay their staff properly
* They're required to dramatically improve their fuel usage and efficiency
* They're required to protect the environment, in particular their mooring and waste disposal practices
* They're required to improve their onboard sanitation so that the spread of noroviruses, bacterial infections and other transmission is much better filtered and controlled.
I expect they're basing two years on the time a vaccine will take to get to market, and judging that everything that happens prior to then won't help much.
Getting a vaccine is not a given. We don't have a SARS, MERS or HIV vaccines, and its been multiple decades for some of those. Having a SARS-CoV2 vaccine in two years is wildly optimistic.
Small-medium hotel owner here, that used to write code for a living.
What just happened in my industry, is forcing me to go look for a job. I don't think we are going to open for summer season or even if we do its not gonna make enough to live by.
Hundreds or thousands of years ago, a few had all the wealth and then most people were poor. We even had slaves.
I can't believe that in 2020 and with all the knowledge we've acquired as humanity we've allowed a few people to acquire all the wealth.
I am gonna struggle with paying any tax coming my way this year, or even supporting my employees who they very much need the job. And on the other hand, there are corporation that don't need to pay much tax through their umbrellas and then again they pay their employees peanuts so they can have a CEO that is worth in the hundred of billions of $. Sad to see that humanity hasn't improved at all.
But it's not this way everywhere: there are countries (I'm thinking of Scandinavian) where inequality is perhaps not so bad, and there are countries where governments are making major and genuine efforts to support businesses and people who are at risk of (or who have) lost their jobs due to Covid.
There's bad leadership and bad behaviour in many places, but not everywhere all at the same time.
Global population is 7.8B. Scandinavia's population is 25-26M (Norway, Sweden, Finland, Denmark). So your point applies to countries with 0.33% of humanity, which is not representative at all. Maybe add a few tiny countries or city-states and I would be surprised if their aggregative population crosses 2% of the overall global population.
So I believe GP's point still stands - humanity has not learned the lesson from thousands of years of its history.
The entire rest of the world that's not part of Scandinavia is not the polar opposite. There are many countries, and much diversity in their equality and government responses.
> I can't believe that in 2020 and with all the knowledge we've acquired as humanity we've allowed a few people to acquire all the wealth.
This is the most prosperous time in human history. There are more people alive right now than ever before. They live longer healthier lives and they’re more educated than ever before.
On every continent but Africa people are richer now than was the case after WWII. In the US, the richest country that has ever existed people are just coming out of one of the longest economic expansions in history.
What city are you in? A few years back I quit my QA job to travel from city to city in Europe and stayed in hostels. I loved Paris. The people running many of the hostels there are still friends to this day.
If there's one thing I've learned from the dotcom crash and the 2008 collapse, it's this: when the crap hits the fan, cash is king. Start-ups without profitable business models are extremely vulnerable. All of the pitches about exponential growth and glorious future profits carry little weight when investor psychology turns negative. So if you have a large pile of investor capital and you have investors who can't / won't claw their money back, you may be OK. But don't kid yourself that you are on an easier path.
I'm not sure why you think zero revenue is the default state. That's generally only the default during the short period of time in between selling angel investors on an idea or proof of concept and getting a first round of VC funding. Somewhere in the middle of that is launching a viable product and demonstrating a potential revenue stream while convincing investors there is a sizable addressable market you can poach from competitors or convince buyers they need a service they've never had before. Zero revenue is otherwise a short sprint towards irrelevance and insolvency.
Startups with a little bit of runway have to cut costs now to extend it, i.e. staff cuts, or they're also on a short spring towards insolvency. All business negatively impacted right now are extremely adverse to new expenditures for the next few months, and might only be slightly less so for the next six months to a year after that. All spending not absolutely essential to keeping the lights on is getting cut.
My workplace had contracts with a number of startups (and some more established) that provide industry-specific services, and as a matter of course we insist on a "force majeure" clause in contracts. As a result we are strongly moving towards terminating those contracts. We are considering it even for one or two that are close to being mission critical, because revenue loss just through June is in the range of $30,000,000. That represents roughly a 40% drop over expected revenue for that time period. Projections for the next quarter are much, much worse, even in an optimistic "we might be slightly less restricted as a society in 2-3 months" scenario.
Given this environment, startups that do not supplant an existing service for a lower cost, have VC confidence and can "hibernate" for a time, or some other type of product that can help businesses stem losses rather than just make some activity slightly easier and more seamless... only those startups will weather this storm.
> We're designed to weather this kind of storm because "zero revenue" is the default state.
This is completely contrary to what common sense would tell you if you ask yourself "what corporation would best survive a depression". Pick and choose any qualities, any sector, any background and be honest with yourself.
My bet for what company I would prefer to own is something along the lines of:
- Industrial manufacturing of common goods that are necessary for people, not industries, without many external factors where you are not exceedingly (more than others) exposed to price fluctuations of other goods. This could be ketchup, medicine, toilet paper, you name it.
- A long history of sustained profit leading to cash on hand which you can use to compensate for downturns that you can be almost 100% sure are temporary.
- Infrastructure in place that you can scale down and then back up without losing massive amounts of competence or inventory quality.
Here's what I wouldn't like to have:
- Complex technical software development that is completely optional for both people and industries, completely dependent on external factors and therefore heavily hit by economical downturn.
- An unknown company with no history (startup) with zero cash on hand to compensate for a downturn that you can't even know if it's temporary or if you need to pivot completely.
- Severe penalties for scaling down as key intellectual competence disappears from the company, causing double work when resumed and possibly a lower quality product going forward, making it even harder to sell.
I'm not trying to get you down, but don't kid yourself. This is definitely not the type of climate where you would elect to be a tech start-up.
I think this is definitely true for venture-backed startups which scaled conservatively. However, scaling conservatively runs directly at odds with what a lot of venture backed startups are expected, told, or cajoled into doing. For those that went along with the conventional wisdom of the times, they're now extremely overextended having spent all that potential runway with no way to get it back and no hot marketplace nor profligate VC to carry them over the next threshold.
You're absolutely right though. There are folks who are getting decimated who are part of the sustaining normal economy, and comparatively speaking having a "war chest" of capital, either VC supplied or otherwise, is a much more comfortable place to be.
If a business - any business whether a takeaway restaurant or a food hall or a white table cloth sitdown - cannot scrape by for more than a few weeks without steady revenue, wouldnt you say they are in a highly saturated niche or a highly saturated location or both or that they don't serve anything distinctive whether its their food or the experience, that couldnt be replaced by any other Joe Homecook with comparable resources?
Why is that restaurateurs deserve a special shake when your local HVAC guy does not, especially when the margins are so thin probably because they cant charge a premium for their offerings as they don't offer anything distinctive or compelling?
Most businesses operate that way for the same reason Starbucks doesn't check your ID every time you go to the counter to pick up a coffee. It's cheaper to just make another coffee in the rare scenario someone takes someone else's cup than to slow down everything. It is the optimal happy path that leads to far more productivity.
My comment was calling into question the viability & competitiveness of most restaurants that cannot weather a sudden change of fortunes. They are not be confused with long-lived, well-run and meticulously managed restaurants that stand the test of time because they offer something compelling. Most restaurants don't fit that bill and never had those ingredients baked into their DNA, to begin with.
Peter Thiel has opined on this in splendid detail:
In 2001, my co-workers at PayPal and I would often get lunch on
Castro Street in Mountain View, Calif. We had our pick of restaurants,
starting with obvious categories like Indian, sushi and burgers. There were more
options once we settled on a type: North Indian or South Indian, cheaper or
fancier, and so on. In contrast to the competitive local restaurant market,
PayPal was then the only email-based payments company in the world. We
employed fewer people than the restaurants on Castro Street did, but our
business was much more valuable than all those restaurants combined. Starting
a new South Indian restaurant is a really hard way to make money. If you lose
sight of competitive reality and focus on trivial differentiating factors—maybe
you think your naan is superior because of your great-grandmother's recipe—your
business is unlikely to survive….
The history of progress is a history of better monopoly businesses replacing
incumbents. Monopolies drive progress because the promise of years or even
decades of monopoly profits provides a powerful incentive to innovate.
[1]
Peter Thiel Will Not Be Opening A South Indian Restaurant In Silicon Valley
Mobile friendly quote (don't use code formatting for quotes):
> In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View, Calif. We had our pick of restaurants, starting with obvious categories like Indian, sushi and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was then the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother's recipe—your business is unlikely to survive….
> The history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.
Starting a restaurant because you think your great grandmothers naan is superior is not dumb.
Neither is it dumb to start a restaurant because you love feeding people, or a bike shop because you love repairing bicycles, or <insert any other scenario>.
As long as you know what you’re getting into, it’s a perfectly honorable way to live your life and there are ways to make it work.
EDIT- at least there were ways to make it work during non pandemic times. I hope we will see an upswelling of these types of businesses in the wake of this, although you couldn’t pay me to take bets on a timeline.
Not necessarily to get rich, but to be around for long enough to even offer your food to enough people that will appreciate the superior taste, nutrition and craft that went into all of your offerings.
If you are having to seek alms just to pay the bills or resort to charity to even sustain yourself as a restaurant, there is something fundamentally wrong with the makeup of what you offer. Simply put, far too many people think they have what it takes to run a restaurant. Their abilities and resourcefulness cannot match their over sized egos.
Founders aren't dumb. They need to survive through the war of attrition, and they will find ways to extend that runway. It's naive to believe it will be business as usual just because you're used to "zero revenue".
If future rounds aren't coming (guess what, in this economy, they aren't), you extend runway by cutting expenses. Anyone with a career older than ten years knows how this will go.
You don't have to be dumb to be inexperienced. An awful lot of startup founders are young and were propagandized endlessly about being entrepreneurs, etc. Downside risk is an alien concept to many of them. Many of them do not actually know how to cut expenses because they've never known a time when the now-no-longer current fluffy, cushy environment wasn't standard.
Startups are more than just "us tech bros", though. If your company sells a physical product, for example, then you're typically reliant on either warehousing personnel on your own payroll or a third-party logistics (3PL) provider, both of which have been hit hard with COVID-19-related shutdowns. Pickers or packers or forklift drivers can't (usually) do their jobs from home; they need to be onsite at a warehouse to to do their work, and if the warehouse is literally not allowed to let employees in the door because the company is a "non-essential business", then guess who's getting laid off? For companies selling physical products, this threat is existential.
There are lots of startups that sell physical products. I work for one of them. We're doing pretty great for now (we sell, among other things, toilet paper and hand sanitizer / soap and cleaning supplies), but we also recognize that we're lucky, and that luck is unlikely to persist if this "great unwinding" lasts longer than the COVID-19 panic unless we do everything in our power to reduce costs and extend that runway as long as possible with the current tailwind. Most startups selling physical goods ain't so lucky (see also: the ones in the article, even if the article didn't really go into much detail on it).
>"By our very nature, we need months of runway just to keep >running. We're designed to weather this kind of storm >because "zero revenue" is the default state."
No you are not designed to weather this cataclysm. Especially a start up. This is the great cleanse. 2008-2020. We had a good run!
That is a different topic. Yes, your friends in manufacturing, hospitality, services (FIMHS) are on average probably worse off. If we compare your FIMHS to the poor in India, then suddenly your FIMHS are well off and are not deserving of attention either...
My experience is that "Mom and Pop" shops are generally awash in capital to the point of forgetting to bill customers for months on end. The are "over capitlized and under leveraged" and they offset their thin margins with absurdly low fixed costs. The biggest danger to their businesses is that the proprietors might be older and decide to retire instead of toughing this out.
On the other hand my experience with slightly bigger suppliers/vendors with 5+ employees is that they run into cash flow problems all the time and do in fact seem much more vulnerable to this shock than a startup with no inventory and cash on hand.
I'm still a little shocked when hearing this, though. I'm talking about the small business who face bankruptcy after a single month of downtime/no income - that doesn't sound like a healthy business anyway if you didn't just start out. Or maybe I'm thinking the wrong size, where you have tons of recurring costs?
Also freelancers (in IT, so assuming enough income usually) who are panicking because they couldn't sustain a few months.
Only exception I'm seeing are restaurants and shops with large inventory and a lot of personnel.
Unlikely. I've been through 2001 and 2008. Startups will cut things to the bone because most of them are cash flow negative, and that next VC round will be delayed 12+ months, maybe never.
> thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased operations overnight.
It would be foolish of them to fold instead of getting loans. And it would be foolish of a bank to deny a good business a loan to get through the next couple years. I think much of the moaning about closing up is to encourage low-cost loans. Which is fair, because the government should be subsidizing such loans to lower the bar for a "good" business.
One issue is the time it may take to get a loan approved and have funds available, especially during a crisis as dramatic as the one we’re in. The other larger issue is that the loan is incredibly high risk because the owner may not ever be able to pay it back and in some cases be asked to put their personal property up as collateral. If getting a loan was such a slam dunk, many more owners would be pursuing it, but the realities are, they may be worse off taking a loan they cannot pay back versus closing up and moving on.
Note: the OP heavily edited the original post which heavily downplayed the potential impact to startups because of some magical force that insulated them from all ill.
A startup, by definition, is a business that hasn't yet figured out how to turn $1 into $1.01 in the best of times, and relies on investment money to fund its operations.
They are in no way shape or form better suited to weather an economic collapse than a traditional business. Traditional businesses know how to turn $1 into $1.01.
Working for an electric utility. It's incredibly stable and no one has been let go. We still have all our contractors with us as well and are hiring in a few areas. People will always need power.
You cannot disrupt a market if the market itself ceases to exist. This is basic stuff.
A whole load of VC stuff relies upon the larger market to predate, has stupidly vapid IPO targets (which the actual big boys, Central Banks, are now culling off, since their actual liquidity stuff like Reits etc are crashing) and basically 100% worthless business models.
"Juicer" or whatever it was?
Go look up what Glencore is doing (20% emerging markets just disappeared) and get back to this thread and start figuring out an exit.
No-one in this thread seems to note this: try finding some ex-Soviet citizens who lived through 89-96 and ask them some serious questions.
~
Seriously: I was told HN was were the semi-smart tech people hung out.
Look: you just got slammed with ~10 mil unemployment in the USA. Call it 10% of workforce. Most developed countries are now running at 15-30% and it's about to get worse.
Entire industries are pretty much relying on bailouts or they fold (leisure, air (non-freight), cruise, hospitality, restaurants) and the people who own the real estate (or lend it out, Reits / Mortgages) are going to get hit by their tenants / clients being unable to pay.
You're not in the "ramp to land" scenario - you're in "this VC is going to look at the contract and claw back the largest % of capital they can, in the next 4 weeks, due to margin calls and other commitments".
Anyhow: no-one will read this, but it's fair warning to you guys. You're about to get frack'd, hard.
Please review the HN guidelines linked at the bottom of the page. I think the combative tone and the mention of downvotes, both of which are against the guidelines and are actively enforced by moderators and readers, is contributing to your karma woes more than the content of what you are saying.
(For whatever little it's worth, I suspect your assessment is correct.)
> No-one in this thread seems to note this: try finding some ex-Soviet citizens who lived through 89-96 and ask them some serious questions.
If there's one thing the dissolution of the Soviet Union proved, it's that a complete economic and political collapse does not prevent people from disrupting markets. Many Western companies got their first foothold in the region during that time.
By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.
Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased operations overnight.
My friends and family in startups are doing fine, for the moment. It's those that chose to work at the more stable, traditional work environments that are getting wiped out, and much less likely to return when the economy starts back. Because when it does, there will be money ready for investment - extending your runway to get there for a startup is more straightforward. But when you're a bigger business with little cash and no-one is buying assets right now, you literally are unable to make any decision to help.
I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.