It has crept across borders, closed our cities and forced swathes of the world’s population to live for months confined to their homes.
Coronavirus has spread from its epicentre in Wuhan, China, late last year, resulting in a seismic shift in human behaviour and a huge blow to economies the world over.
For some countries, including the UK, government crackdowns to mitigate the spread of Covid-19 have been the most draconian measures ever taken in peacetime, meaning that many people with jobs they are unable to do from home cannot work, and thousands of businesses and venues have closed.
In the US alone, CNBC has reported that 47m people could lose their jobs as a result of Covid-19 and the unemployment rate could hit 32%, topping the Great Depression’s peak of 24.9% back in 1929.
J.P. Morgan Global Economics Research says the global economy will “experience an unprecedented contraction” during the first half of the year as widespread global quarantine procedures drive “deep collapses in monthly economic activity”.
Now more than ever, cash reserves are critical, and companies with deeper pockets will be more likely to survive in times when business drops off and balance sheets need to be propped up.
But for smaller firms and start-ups, tapping a pool of capital and keeping afloat is much harder.
Cash is king
In these difficult times, companies that have very recently cashed in will be in the best position, Concrete VC partner Taylor Wescoatt says. “Companies that we’ve just invested in, or companies that have just raised capital – I’m super-happy for them. They will be able to stretch their costs and prepare and hunker down until things turn around.”
But with recent reports saying that it will take months to get back to normal, and potentially years to get the global economy back to pre-coronavirus levels, exactly how much does the average small property business have in the bank? According to the latest figures we have from a JPMorgan Chase Institute report from 2016, which surveyed 600,000 small businesses, this could be less than two months’ worth of cash.
The company’s Cash is King: Flows, Balances and Buffer Days report says small property businesses could have 47 cash buffer days (the number of days of cash outflows a business could pay out of its cash balance if inflows were to stop).
Small businesses may already be beginning to tap into their cash buffer days. According to research conducted by Tech London Advocates (TLA), who surveyed 312 tech companies and digital businesses based in London, 63% are citing cash flow issues and a fall in demand.
The extent of financial stress that coronavirus could have on start-ups depends on which sector you’re in, Wescoatt says. In times when consumers are replacing physical shops with online shopping, operating in the industrial space is a good place to be, whereas for high street stores Covid-19 is yet another “headwind to a space that was already struggling”.
‘It’s super-hard’
If, as Wescoatt says, cash is king, start-ups looking to raise funds in the current economic climate will find it difficult.
“When the economy goes down, VC investment slows down – in all sectors, not just proptech,” he says. “VCs need to return their capital in a defined period of time, and they need a certain rate of growth in their investments over time. Start-ups, except the ones that are really benefiting from coronavirus, can’t grow at the moment. So fundraising for anyone in any sector is going to be hard right now.”
Rebeca Perez, chief executive and founder of Inviertis Properties, knows exactly how difficult raising capital at a time like this is. The Spanish start-up provides an online platform, connecting investors with residential buildings with tenants already living in them, and the start-up was in the middle of its first funding round.
“We have been able to bootstrap up until now, but we were looking for funds,” Perez says. “So, in the middle of our first financial round, this has been the worst-case scenario.”
Perez noticed at the beginning of March that coronavirus was starting to affect the business. Investors began to cancel their viewings en masse, and tenants began to refuse investors access into their homes as the pandemic hit Spain increasingly hard.
By mid-March, “everything collapsed”, Perez says. “Everything stopped – visits to the websites, calls – and we had to take some security measures for our employees; we asked them to stay at home and sent their computers home.”
It got to breaking point for Perez. “I thought, ‘I can’t carry on, I prefer having the savings in the bank because who knows what is going to happen,’” she said. But after a call with her partners, Perez decided to continue operating the business.
“We have made a contingency plan, but we don’t think things will get back to normal at least until June,” she says. “It’s super-hard, honestly. The truth is, the first few days, I could barely sleep. Every time, as a start-up founder, you bet and you risk all your wealth – your family’s wealth.”
Sales on ice
For some start-ups that have spent years developing their product only to see coronavirus quash a long-anticipated launch, it can be the ultimate “sting in the tail”, says start-up co-founder Kristjan Byfield.
Byfield co-founded The Depositary, a platform for agents, landlords and tenants that helps manage the end of a tenancy, four years ago when he and fellow co-founder An Deckers decided to build the platform.
Earlier this year, a soft launch of the product was held, and 15 companies were keen to sign a deal with The Depositary. March was going to be the month when the company would make a big sales push, but this has now been put on ice.
“It’s frustrating,” Byfield says. “We were so excited about finally getting to the next stage, and the frustration for us is now being stuck in limbo land. But we have to keep moving forwards.”
Byfield says the business was hoping to break even on revenue at a cost-neutral point, and to do so would mean signing up 400 agency branches between March and the end of the year, but that has been “blown out of the water”. Now, Byfield is roughly targeting to sign up 100-200 branches by the end of the year.
However, he counts it as “a blessing” that his business is self-funded. Profit made from Byfield’s agency business, Base Property Specialists, which he also co-founded with Deckers back in 2004, has been reinvested into creating The Depositary.
“Thank God we’re not sitting on several million pounds’ worth of funding, with whoever is behind it breathing down our necks,” he says. “I know, talking to other people, that it’s really scary right now and businesses are under a lot of pressure because of the finance put into the business. They are facing some scary things to keep the business alive.”
Although raising funding was “always going to be part of the journey” for The Depositary, Byfield says the company’s ambition is to self-fund for as long as possible, but adds that coronavirus could potentially accelerate any future plans to fundraise.
Call for greater government help
With many governments providing billions of pounds’ worth of economic stimulus packages, accessing help can be a lifeline for many self-employed people.
But those outside the scope of government help are facing a worrying situation, such as Cleo Folkes, who founded Property Overview two and a half years ago.
She is one of many who do not qualify for UK government aid as she is a limited director of the company. She says she cannot access the government’s £330bn coronavirus aid package for small and medium-sized firms.
“I don’t pay small business rates, so I can’t apply for the small business rates loan, so I can’t get a grant,” she says. “The self-employed scheme does not apply to limited directors, and I don’t think I can furlough myself as a director. The only thing I can try and do is apply for universal credit.”
Folkes set up her company, which runs face-to-face courses introducing new entrants to the property industry, in 2017. She began to notice business dropping at the beginning of March, and now it has completely dried up.
After applying for alternative work, Folkes has had to refocus her business on providing consultancy work suited to risk management after securing work in this field.
“After the traditional routes for income at Property Overview dried up overnight owing to the crisis, I decided that I had to do what I could to survive,” she says.
She hopes that in a few years’ time she will be able to reintroduce training courses to the business, but for now she is adapting to meet market demand. “I might, bizarrely enough, end up saying that the Covid-19 crisis enriched the work that Property Overview does,” she says.
Folkes is not alone in calling for more support and intervention from the government to help avoid the desperate situation she was in. TLA founder Russ Shaw calls for the government to put its back into financially supporting start-ups during these tough times.
“We are navigating an unprecedented set of circumstances which are having an enormous impact on all businesses – but ultimately, tech start-ups are very vulnerable as many of them are loss-making,” he says.
It is this loss-making nature of start-ups that has not been accounted for by the UK government in its £330bn economic aid package. “These measures do not accommodate tech start-ups that operate on a loss-making business model,” Shaw says. “The chancellor must include these businesses as part of the state-backed loans programme if it is to protect the viability of the tech community and ensure its success in the long run.”
Failure to react quickly to stress points suffered by start-ups could be the difference between businesses sinking or swimming. In times when tech is the only means through which we can still keep industries across the world up and running, ensuring the financial health of business-critical start-ups is more important than ever before.
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