RALEIGH – The coronavirus pandemic has triggered a shakeup so sudden that many Triangle startups have been left reeling in its wake.
In just a few weeks, reports indicate that many are being forced to cut or furlough employees, apply for emergency loans and make hasty plans to restructure just to stay afloat.
The fallout is even hitting high-profile startups in Silicon Valley. Airbnb, the home rental startup valued at $31 billion, has stopped hiring, while Bird, an electric scooter startup, laid off 30 percent of its staff last week, as reported by the NYTimes. Some are calling it the “great unwinding.”
“Whenever there are big paradigm shifts like this, there’s going to be big winners and big losers,” Cofounders Capital CEO David Gardner said in a video interview. “But I would say across the board, there are more losers,” he added bluntly.
He manages around 40 startups between his venture capital firm and personal investments. He said many of his portfolio companies are making some significant slashes to payroll.
“Our companies are recession proof. They’re not pandemic proof. When your customers just aren’t at work fine. There’s nothing you can do. The lifeblood has been turned off.”
WalkWest CEO and angel investor Donald Thompson also has a view on the ground, and admits it’s tough.
“Right now most, if not all, startups are experiencing significant pain as sales cycles get longer and true qualified prospects are harder to identify,” he wrote in an email. “Downturns are not new, but a global pandemic is a new and daunting frontier.”
He said very few checks are being written and deals in due diligence are being slowed until there is better economic visibility.
“If firms have strong recurring revenue or large firms as anchor clients, then chances of weathering the storm improve. The silver lining, for startups and small businesses that make it, will be access to talent. The economic recession that is looming means that one or two key people that you need will be more readily available.
“If your technology can measurably save time or money,” he added, “prospects will remain active because large companies will chase efficiency as layoffs loom.”
Experts agree that impact is determined industry by industry.
Raleigh software startup Pendo, for example, is adding employees.
“It’s become abundantly clear to me that if we’re going to achieve our company’s mission to improve the world’s software experiences, then we need to double down on our investment in Pendo’s most valuable asset—our employees,” CEO Todd Olson wrote in a blog post.
“That’s why I told the Pendo team that we’re going to continue hiring, especially in the area of product innovation, during this period of economic uncertainty.”
Seeking emergency help
This is a snapshot of the view on the ground for the Triangle in the weeks since the coronavirus crisis has erupted.
As society shuts down and people shelter at home, many startups are lining up today to apply for emergency loans from the federal government’s some part of the federal’s government $2 trillion coronavirus economic relief package.
“Yes, we are going to apply,” said Scot Wingo, CEO and founder of Get Spiffy, an on-demand car maintenance firm in Morrisville.
“It would be crazy not to apply, this is essentially no-strings attached grants for helping cover payroll during this tough period.
“I’d expect pretty much every business from restaurants up to tech startups that can get the information together quickly, has a banking relationship and doesn’t disqualify due to the employee count, foreign-owned rules or affiliate rules to apply as quickly as possible.”
On Thursday night, just hours before applications opened, Wingo held an open webinar for local startups with legal experts to explain filing for the new loans.
Such is the demand that more than 60 attended the Zoom call held into the late evening.
Wingo reported a fair amount of anxiety among the group.
“I believe it’s first-come-first-serve, so there’s a lot of urgency around the program. Also, there are ton of questions around the calculations and the loan amounts.”
Another Triangle entrepreneur, Brian Hamilton, has reservations about the program.
“There is a glitch in the plan- it delegates authority to make and approve the small business loans to 7(a) lenders, banks like Wells Fargo who make SBA loans,” Hamilton wrote in a post published at The Hill.com.
“It is good that money is being provided for loans, but the vehicle for those loans is poor, as banks are not very agile and are slow to make loans in uncertain times. Anyone who has ever applied for a loan, even in a good economic climate, can attest to this fact. Today, we need a Ferrari, not a horse and buggy.”
Proceed with caution
Still, emergency loans shouldn’t be the only answer, Gardner said, and startups should proceed with caution.
“Just because you can get two-and-a-half times payroll, in a low interest loan from the SBA doesn’t mean you should,” he said.
“What it might do is emboldened some of our CEOs to keep a bunch of employees that they really should not.”
Instead, Gardner sent out some guidance to his portfolio companies. Among the recommendations: Don’t give up on sales, and err on the side of cutting projects and retaining your best human assets.
“I hope startups don’t look at that money as an excuse not to right size their enterprise. You still have to adjust your business for your forecast,” Gardner said. “Putting a bunch of debt in there that you are probably going to have to pay back, doesn’t fix any of your problems. It just adds more debt to the stack.”