Small businesses have undoubtedly been hit hard during coronavirus, and Main Street America, an initiative of the National Trust for Historic Preservation, estimates that up to 25% of them could shutter in 2020. However, a number of companies and industries have thrived during the pandemic—particularly within the small business landscape.
As consumer behavior shifts, there are a number of opportunities for would-be entrepreneurs to start businesses. As you consider launching a startup in the COVID-19 era, you’ll need to closely examine whether your product offering fits into current needs, and understand the trends and challenges around developing a budget and obtaining financing for your company in a changing environment.
What Is Your Product Offering and Why Now?
In a phone interview with The Balance, Jennifer Neundorfer, general partner at venture capital investors January Ventures, said that companies starting right now are particularly well-equipped to provide a unique offering.
“We are finding that early stage startups are best equipped to respond to these changes because they don’t have any legacy systems, teams, or products and are able to take a fresh view on the world,” she said.
Discover In-Demand Areas
Neundorfer noted that her firm is seeing several areas that stand out as opportunities for new startups, including digital health, productivity and the future of work, and fintech and financial services. Meanwhile, the U.S. Chamber of Commerce expects to see a rise in demand for service-based businesses such as commercial cleaning, errand services, virtual personal training, and box subscriptions.
Potential business owners who want to serve current needs can use Google Trends to review what people are searching for. Think about how you may be able to serve new consumer needs, or review other companies’ performance in a variety of sectors to spot potential areas for growth, even during a pandemic.
Determine Whether Your Product Meets the Market Need
“One thing that is important for companies right now is to make sure that what they are selling is a ‘painkiller’ versus a ‘vitamin,’” Neundorfer advised. “Companies are tightening their budgets and dealing with very acute issues right now. So getting mindshare from the companies or customers you’re selling to is hard. If it’s not keeping you up at night, it’s not a solution you’re going to start thinking about—let alone pay for.”
For people just starting out, she suggested asking the tough market validation questions to make sure you’re addressing a top pain point for the customer, figuring out a way to quickly sell into it and establish traction, which will attract investors.
Understanding startup expenses is key to coming out of the gate quickly and indicating to potential investors or loan underwriters that you are to be taken seriously.
Speaking to The Balance via phone, Greenwood Capital Advisors Managing Partner and SCORE Mentor Ken Alozie, who helps put together financing for small and mid-sized private companies, said that you must start out with a clear idea of how much you need.
“As basic as that sounds, I talk to so many businesses who say they do not know. If you do that in front of a banker, it’s a huge red flag that shows you haven’t thought your business through.”
Determining Startup Expenses
Startup expenses will vary depending on the business, but Alozie suggested that startups tackle the calculations in a few steps.
- Write a business plan: The process of writing a plan will help you walk through the different startup capital needs, such as whether you need office or retail space, equipment, inventory, or how many people you’ll need to hire.
- Consider ongoing costs: Many companies forget that they will need some runway for operating costs before they turn a profit. Alozie advised setting aside some cash—ideally enough to get you through the first year.
- Use your network: Reach out to someone in your personal network who has a similar business. They are likely very willing to help or provide guidance.
- Search for industry reports and filings from publicly traded companies: Alozie noted that relevant industry reports often have cost information and trends that are relevant to startups. Similarly, finding publicly traded companies in your industry and reading their filings can provide insights into strategic issues, considerations, and risks. While their numbers are exponentially larger, these filings can paint a picture of what to expect.
Calculating Various Startup Scenarios
When thinking about your startup costs, Alozie warned that being flexible is key—especially if you are looking to get financing for your idea.
“When people are planning their startup costs, they often think of doing it in a full-blown manner,” he said. “That can be a hard loan for most startups to get unless you have personal experience in the industry or a lot of personal collateral.”
Alozie recommended that entrepreneurs start with the best-case scenario for funding, and then create two scaled-down scenarios.
For example, instead of buying land and building a facility, which could cost $800,000, could you buy an already-built facility and spend $100,000? Could you rent and spend $50,000?
Financing Your Startup
Startups have a variety of options around funding and financing, from bootstrapping to taking out loans to finding investors. COVID-19 has affected the availability of funding, according to Neundorfer, shifting the favor from the startups to the investors.
“Funding sources have more leverage than they did 18 months ago,” she said. “But great companies with strong leadership and demonstrable traction are still demanding a premium.”
Determining the Right Type of Funding
“Look at yourself in the eyes of a bank or investor,” Alozie suggested. “Think about what your strengths are as a borrower.”
Banks will evaluate a founder’s three C’s: credit, collateral, and cash flow. According to Alozie, most traditional banks need all three to make a loan—though some private lenders may take one or two. As a startup, you have no cash flow.
If you don’t have a lot of personal collateral or a FICO score above 600, it will be difficult to secure a bank loan, so you may want to consider other funding like angel investors, VCs, or even crowdfunding.
If you do feel you are a good candidate for a bank loan, Alozie recommended that you lead with the three C’s and treat your meeting with a loan officer as you would a job interview, highlighting what your strengths are and connecting the dots for them.
“They’re looking at a dozen opportunities,” he said, pointing out that loan officers are often conservative in their decision making. “An underwriter is never fired for the loan they didn’t make—it’s the loan that went bad that draws scrutiny.”
Angel Investors and Venture Capital Funding
Angel investors and venture capitalists (VCs) invest in a company in exchange for a portion of its ownership and can be a viable option for companies who don’t want or qualify for bank loans. Angel investors, who are high net worth personal investors who fund early-stage startups, are most appropriate for founders who do not yet have a product or are establishing proof of concept, Alozie said. VCs, meanwhile, focus on companies that have a product but need help going to market or expanding, or those with a scalable business model.
Neundorfer found that after a lull at the start of COVID-19, VC investing is starting to heat up again. “We are seeing capital deployed,” she said, adding that many funds had a learning curve in meeting with and evaluating startups remotely. “In general, there is consensus among the investing community that great companies are going to be produced at this moment.”
Because pitches continue to be done virtually, Neundorfer recommended that founders nail a virtual pitch and find ways to make it stand out. She also suggested backchanneling so that even if an investor is not meeting with you in person, people who know you well are able to provide you with references and validation.
Other Funding Options
If a bank loan or an investor are not options, there are other ways to fund your business, including crowdfunding and/or business credit cards.
A variety of crowdfunding sites exist, ranging from those that sell small investments in the business to those looking for donations to help get a product off the ground. It’s important to research the options that would best fit your goals and audience.
Business Credit Cards
Alozie said many founders overlook business credit cards, which can be a great way to gain funding and also to protect your personal credit. Business credit cards will submit your profile to banks across the country, with the only requirement that you have strong personal credit. With a card under your business, you can start building credit for the company—particularly important as you deal with suppliers and vendors. This also protects your personal credit score, which can be damaged by increased utilization if you start using it to fund your business.
The Bottom Line
Launching a startup in the COVID-19 era has its share of challenges—namely, a rapidly changing landscape of consumer behavior, appetite from investors, and available funding sources. While this can be tricky for entrepreneurs to navigate, those who are able to develop a solid business plan and establish funding for their business have a great opportunity to grow a new company during this time.