While it is still a hard task to predict the level of change we are facing in the many socioeconomic pillars that rule our society, we are certain that challenging times lie ahead for most of us. The impact investing ecosystem is no exception to what is coming.
This article illustrates how the ecosystem is affected and how startups navigate this complex maze we are all in, by focusing on Maze X startups. Maze X is a pan-European impact startup accelerator based in Lisbon.
The first thing to bear in mind is that we must be caring both about the short-term (how startups are being affected in times of global lockdown) but also and especially about the medium to long-term (how the coming crisis will hit the market).
The impact of the current lockdown is only the tip of the iceberg and the short-term impact is not an exact prediction of what is to come or how companies will cope.
How are impact startups being affected in the short-term?
The COVID-19 crisis has affected companies differently depending on factors such as business model and industry. Companies such as Springkode (a marketplace for high-quality garments made of unused industrial textile) or Siteinander (a service that allows parents to share babysitting), whose models are dependent on a direct sale to consumers, are likely to be going through stronger disruptions than those securing annual contracts with corporates (such as Chatterbox, an online language learning platform supported by the refugee community, or goodbag, a smart reusable shopping bag that plants trees for each consumer purchase).
In the case of Springkode, under lockdown, the sales levels in the fashion industry dropped to almost zero, as it is an industry greatly dependent on social movement. In the case of Siteinander, even though the consumers’ needs may still exist under such abrupt conditions, the conditions for the model to operate ceased (i.e. parents are still in need of babysitting support but it is no longer possible for families to be in direct personal contact with each other), which was sufficient to block this model during the time of the quarantine.
What key questions should companies be asking themselves and what actions to take?
The reactive and proactive steps to take depend on the individual circumstances of each company. Some of the questions that teams are asking themselves are:
1. Do we have operational idle capacity and the necessary flexibility to manufacture products in market shortage (as a means to cover the main cost structure while delivering positive social impact)?
Springkode took this path. Together with their partners (factories), they adapted to start producing non-medical masks to commercialise. This is a reactive adaptation to the crisis, which may bring social value and may support the company structure, however it may not be the only necessary response to ensure the company’s medium-term success.
It is crucial that such urgent model adaptations happen with as little operational disruption as possible (the case for Springkode), as there may be the risk of dispersion and loss of focus. Something no one can afford today.
2. How have consumer needs and behaviours changed? What can we do to continue serving and being of relevance to them?
These have been some of Siteinander’s questions. Their answers started by a blunt: we do not really know, which sent them straight to phase one of product development: ask our clients directly. By sticking to their social mission and engaging with their customers, Siteinander started testing a few new MVP-like projects as a response to the new social needs, such as a Slack-chat-community for parents where they can exchange ideas, advice and get to know other families. While this is a short-term solution, Siteinander is still focused on making sure their main product/service (sharing of babysitting) is ready to add as much value to their clients as soon as the market blockage is over.
In similar adaptations, companies must be aware that the success is not guaranteed and that all the remaining product development phases must be followed with discipline. This strategy may work well in signalling to clients that the company’s commitment and mission drive are real, and it may also represent an opportunity for new product features to be furthered explored in the medium to long-term. However, a solid cost-benefit assessment needs to exist to help teams distinguish between reasonable adaptation from illogical crisis-driven, and perhaps impulsive decisions, which will not bring any value to their main business.
3. How do the current market behaviours help us strengthen our models and thus our impact mission?
In the case of Rnters, a rental marketplace connecting lenders to renters of day to day products, the drop in transactions was not surprising. Not only because during a lockdown people are less active and thus in need of less day-to-day items, but also due to the health and safety issues inherent in using other people’s products.
However, their half-full glass perspective started by assessing that 1) people are spending more time at home and 2) are under stronger financial pressure, thus in search for extra sources of income. This sets the stage to assume that it may well be a good timing to invite people to create their own inventory of products to rent at Rnters, and thus increase their users’ database.
“New” brings as many challenges as opportunities most of the times. Companies should try as much as possible to be curious and attentive in looking for the opportunities that this new (and hopefully temporary) situation may bring to the near future of their business.
4. How else can we ensure the medium to the long-term success of our company?
This is the question everyone regardless of how they are currently being affected should prioritise. The answer takes several steps:
4. 1. Assessing companies’ financial runway and making the necessary plans is a step that should have been taken right at the start of the lockdown (i.e. how many months can companies sustain the current structure under a scenario of no cash inflows? When will they need to fundraise again?).
Sequoia’s matrix is a useful resource.
4.2. A cost-efficient and bootstrapping mentality should follow. Companies must reflect on the main costs they can eliminate or reduce, as no fat is allowed under the present times. Creativity and a 101 startup mindset will play a significant role in providing answers.
4.3. As always, but now more relevant than ever, companies must stick to the discipline of impeccable analytical processes. This will allow them to assess and follow the market reactions which will set the relevance of their business. Volatility is the only certainty we have, and it needs to be addressed as a chess opponent.
4.4. Fine-tune your opportunities radar and be smart about it. Social problems will likely increase, making impact solutions more necessary. On the other hand, the increased unemployment rates may mean that attracting high talented mission-aligned employees may now be easier. Leverage on your narrative and your impact mission.
4.5. Finally, focus on your emotional capital. It is time to lead and thoughtful-leaders care about their mission, teams, customers, partners, investors and the general community. Be it in the form of regular check-ins, strategic involvement or production of relevant content, simply ensure you are there for those you depend on. Business relationships are human relationships, and we all know that markets are not rational, emotions always prevail.
The words of Peter Drucker have never been more timely than now and they should encourage entrepreneurs to just do what they do best: create the future.
“The only thing we know about the future is that it is going to be different. Trying to predict the future is like trying to drive down a country road at night with no lights looking out the back window. The best way to predict the future is to create it.”
In the meantime, MAZE will be here striving to be of the maximum support to all the founders in our community. Maze X’s second edition is about to start and we cannot wait to share more about it with you.
Maze X was conceived and initiated by the Calouste Gulbenkian Foundation, the Edmond de Rothschild Foundations and MAZE, with the law firm PLMJ joining as a founding corporate member and BNP Paribas, Hospital da Luz Learning Health, Casa do Impacto as partners.