The lessons that startups must learn from COVID-19

We are in the midst of one of the most difficult phases in our recorded history. The two World Wars were limited to a few nations, and natural disasters, including the tsunami and earthquakes, lasted for a brief while, with limited, manageable damage.

COVID-19 is dangerous, for nobody knows how long the ordeal will last, what the total loss of life and morale will be, and the invisible impact of this invisible enemy.

The economy will contract, society will plunge into depression, and all bets are off as to when we will return to normalcy. In fact, the pursuit of normalcy might be unwise, for we might be staring at a new normal.

These are times which call into action our collective might, both emotionally and physically, to fight it out in hospitals and to remain grounded in the confines of our houses. But even the most difficult situations can leave us with lessons, and this one is no different.

Coronavirus is a wake-up call for the startup community as neither the pandemic is over nor is it the final frontier of our endurance. Here are three key insights drawn from present times that will help the next generation of entrepreneurs to be less vulnerable and more impactful.

A disciplined pursuit of ambition

An entrepreneurial success story is often scripted with the ink of overconfidence. While the above-average confidence of an entrepreneur often helps her overcome the gravitational pull of reality, the same chutzpah becomes toxic in adverse situations.

The secret of enduring success is discipline, says Jim Collins. Organizations that have existed for over a century and have dominated the very industries that they often created do so by a disciplined pursuit of their ambition. Companies like 3M, IBM, Siemens, Bosch, Johnson & Johnson, and Unilever, among others, have managed to tide over uncertainties, complexities, and severe socio-economic changes by the virtue of being disciplined. And this calls for an ability to say “no” to a lot of opportunities.

Entrepreneurs, often in their bravado, take up more risk than they can manage, and this false sense of power is only fuelled by investors’ money and overall market buoyancy towards entrepreneurial pursuits. Cases in point are upstarts such as Housing.com, Stayzilla, WeWork, Snapdeal, and TinyOwl, which have struggled.

While economic downturns are opportune moments to start a venture, they are equally precarious for ill-managed ones.

As legendary investor Warren Buffet says, “It's only when the tide goes out that you learn who has been swimming naked.”

Times of recession clearly distil the more disciplined companies from the also-ran, and you won’t like to wait till so long.

Honing credible and differentiated capabilities

All mature markets consolidate. We saw this in automobile industries world over, in the telecom space in India, in the high-tech space, and now even in emerging industries, albeit faster. Economic recessions only accelerate such consolidations, for the market’s carrying capacity cannot support so many players.

The real question then is: who will survive and who will wind up? The answer, apart from scale, is the robustness and uniqueness of capabilities. Companies that have painstakingly created a moat around themselves will weather the storm of rapid consolidation. There will always be a market for unique offerings, as exhibited by Royal Enfield and FabIndia over the years.

At the start of an industry, there is often a competitive overcrowding, as was witnessed by the dotcom era in the US and software development companies in India. There is little to differentiate between companies when the market is up for grabs; it is only when the pie is divided that incumbents start to wonder about their unique propositions.

The Indian IT services industry went through this consolidation phase, with just a handful of players available in the big league. The case is even more acute in global parlance, with IBM, Accenture and Capgemini, among a few others, dividing the spoils.

If the entrepreneur hasn’t thought about and invested in building a defence mechanism around the company and its offerings, a recessionary situation can subject the organisation to disintegrative forces. Such organisations become targets for hostile takeover, for there is very little to hold back on. There is little doubt that Chinese companies are on a shopping spree of distressed assets as the world weathers coronavirus.

The most vulnerable of the assets have very little to differentiate on, and hence lose their bargaining power. An entrepreneur must ensure that, in spite of scale, the secret recipe of the organisation doesn’t get diluted or exposed.

Fostering an ecosystem that can withstand economic shocks

A single startup is fragile, but an entire ecosystem is antifragile, to adopt a term coined by Nassim Nicholas Taleb.

In recessionary times, individual ventures will give way to the evolution of entire ecosystems – a mesh comprising of buyers, sellers, complementors, competitors, substitutes, and other support institutions, such as investors, and regulators.

Ecosystems emerge over time and they fade only with time, but that is not the case with firms. As observed by economist Joseph Schumpeter, the very act of “creative destruction” is an essential fact about capitalism. Very few companies manage to tide over great economic cycles.

Firms might perish, but industries survive by reallocation of resources from sunset to sunrise avenues. We saw this in the way talent in our engineering colleges went from clamouring for civil engineering to electrical and mechanical, and then to electronics and computer science as the Indian economy went from massive nation-building projects to industrial revolution and then to the era of IT.

As an entrepreneur in for the long haul, you must think broadly in terms of fostering an ecosystem where you are an important player, but not the only one. While you have to share the spoils with others, you also share the risk of going down - that increases your odds of survival.

Elon Musk is doing precisely this by building an ecosystem of electric mobility from Detroit. He is also giving away his hard-earned patents so that more affordable and pervasive technologies can be built to make electric technology a viable option for mainstream customers. This calls for foresight and a “big picture” thinking.

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Ecosystems are like the great jungles. When a fire breaks out, individual animals might perish, but the jungle only becomes more diverse and robust.

These difficult times are avenues for thinking hard and making fundamental corrections in the way ambitious men and women pursue their dreams of starting a business.

It’s time to bring discipline to the calling, hone and sharpen definitive capabilities, and be selfless in cultivating an ecosystem. This needs one to develop foresight, patience, and a holistic thinking attitude – skills that can come through both aspiration and desperation. It’s not always wise to wait for desperation though.