Business resilience key to startups ahead of post-Covid recession

Technology startups should prepare for the looming post-Covid-19 recession by building up their resilience to resist unattractive acquisition bids, according to technology investment firm AlbionVC.

A post-Covid recession is likely to severely affect the British economy, which is now predicted to suffer the worst damage of any country in the developed world as a result of the pandemic.

Confidence levels of UK startups have already dramatically declined since the onset of the pandemic, with 47% expressing concern about being able to secure private investment over the next 12 months, according to quarterly survey results from London-based digital agency Studio Graphene.

Speaking with Computer Weekly, Robert Whitby-Smith, a partner at AlbionVC, the venture capital (VC) technology investment arm of Albion Capital Group, said saying no to potential acquirers with a big cheque relative to the stage of the business is always a problem for startups, but even more so in a recession.

“Everyone’s a bit more nervous, concerned what the outlook will be, and so things are much more opportunistic,” said Whitby-Smith, adding that shareholder alignment and long-term partnerships were good tactics for startups to adopt in the face of this challenge.

“Before we invest, we want to have a conversation with not just the founders, but the angel investors and any other co-investors, to understand and agree that if an offer for ‘X’ came along tomorrow, that actually ‘that’s not our ambition, our ambition is to grow to ‘Y’’, and agree to a plan.”

In terms of long-term partnerships, Whitby-Smith said a small company partnering with a large company can help the former channel to market and deliver its services to a wider range of customers.

“It’s an amazing way of getting scalability, and there is quite a high correlation… between existing partners acquiring you versus other people you haven’t worked with before,” he said.

“These are often the future buyers of your business and the stronger the relationship you can develop with them, the better they see your value and the more they… can start to see a big opportunity in working together with a joint-value proposition.”

However, he noted that forging these relationships was difficult, and warned against startups entering these partnerships before they have the necessary resources.

“You need to spend a lot of time and effort getting them to understand your proposition, and to build the collateral and the joint-value proposition, or the marketing materials, and to get buy in from the key people within an organisation – it could be an enormous project,” he said, adding that these partnerships were much more important to business-to-business (B2B) than business-to-consumer (B2C) startups.

To avoid a “situation of vulnerability”, Whitby-Smith further suggested that startups should be building their “runways” – the idea being that increased financial security can give startups more room to manoeuvre in difficult situations.

“It won’t be right for everyone, but try to ensure you’ve got 24 months of your monthly burn sitting on your balance sheet, so if you’re losing £100k a month, have 24 times that sitting on your balance sheet,” he said.

“Ideally, you would never go below six months runway, otherwise... you are vulnerable to a low offer or having to make some decisions that kill the business.”

To reach this runway length, startups should either raise more equity if growing at a decent rate, seek a top-up from existing shareholders, or reduce their existing monthly burn. “A lot of our [portfolio] companies have extended their runways by all three methods,” added Whitby-Smith.

“Runway gives you gives you strength. If you have a 24-month runway, you’re in a much stronger position when the low offer comes along to say, ‘No, I’m not for sale’.”

He added that the impacts of the Covid-19 coronavirus pandemic so far fall into two buckets for startups: those that have benefited, and those that have not.

“In the first category, many B2B software companies are proving to be quite resilient, and many are seeing increased adoption, so working from home doesn’t affect developer productivity – indeed, with reduced commuting, a lot of people have got more time,” he said, adding that he still expects areas such as digital health and financial technology (fintech) to be supported heavily with investment going forward.

“These companies, particularly into B2B or sectors where you haven’t suffered the big hit from lockdown, are pretty resilient – they’re on annual licenses, renewable, and are unlikely to have seen much churn.”

He also said profit-making startups were most at risk, even more so than seed or early-stage companies, as they would have built up a bigger cost base by that point, therefore requiring greater support from investors who themselves may be more risk-averse.

“In the other bucket you’ve got companies that are exposed particularly to consumer, face-to-face interaction, which will be sectors like travel and leisure. We don’t focus on B2C… but we have got some [companies] that have end-markets selling into rail, aerospace and gyms – those sectors have been hit hard, as you’d expect,” he said.