Asia-Europe trade deals drive momentum for SME recovery By Kawal Preet As economies worldwide respond to continued waves of the COVID-19 pandemic, there are positive signs in markets across Asia, where cross-border commerce is trending positively against the backdrop of the health crisis. This is [...]
The current ask from startups is not growth, but surviving a global economic downturn. Cockroach startups can make that happen.
Most people aren’t fans of cockroaches. Notorious for being household pests, they are often greeted with a spurt of household insecticide, the whack of a slipper, or a cry of disgust at the very least.
The startup world, however, holds cockroaches in high regard, sometimes even more than their flashy unicorn cousins. Unlike the less-than-friendly approach most humans take toward roaches of the natural order, founders and investors know better than to underestimate these resilient companies.
In startup speak, cockroaches are startups with acutely lean models. These startups focus on staying in business with a very low cash burn rate. They rank long-term survival over potential growth opportunities, and this makes it possible for them to survive in and adapt to extreme volatile business climates.
Cockroach startups hold a tight rein on costs, especially fixed costs (office spaces and IT infrastructure, for instance) and payroll, which they have greater control over. To these companies, market share is secondary to revenue generation – their goal is to reach profitability without burning a dollar more than they must.
A second glance at the cockroach startup vs. unicorn debate
Cockroaches are often compared to unicorns in the startup world. In times with plentiful unicorns, their unglamorous counterparts seem even more dowdy. And yet in the real world, one is known for its hardiness, while the other exists in a bubble of myths.
The term ‘startup unicorn’ was coined to represent a rare 0.07% of companies that made it to the billion-dollar valuation club at the time. When the term first entered mainstream media, only about four unicorns were created each year. This year so far, there are 82. Being a unicorn necessarily comes with a significant amount of funding, and in most cases, extravagant offices and abundant employee perks.
Running counter to this approach, cockroach startups operate with lighter bank accounts and tighter financial controls. They are lean as a means to success, and not only to preserve money. The goal is to stay in business until they make a successful exit, go public, or even become unicorns themselves.
Though that last point may seem counterintuitive considering unicorns are being increasingly seen as overfunded companies with no guarantees of success, some of the world’s most successful companies have been unicorns themselves. Facebook, for instance, was the ‘super-unicorn’ of the early 2000s, and Ant Financial’s upcoming blockbuster IPO alone is turning out to be bigger than PayPal, Disney, or Egypt’s GDP.
The cockroach model in the long-term is as straitjacketed as soaring unicorn valuations are unsustainable. In its journey, a cockroach startup will eventually face the choice of sticking with profitability and operating as an SME, or taking a gamble and going after growth.
Why it makes sense to be a cockroach startup
Funding channels have contracted this year, and startups have found themselves in a period of stress that is expected to last at least a few more months.
Because the way they are built, cockroach startups are wired to stabilize and withstand economic downturn by going as lean as they can. In fact, they embody the advice offered by Sequoia Capital’s much lauded RIP Good Times presentation after the 2008 global crisis, which advocated focusing on spending, growth and earnings assumptions, quality, and lowering risk.
Cockroach startups are also likely to weather market corrections with less trouble than a growth-oriented, cash-burning company.
Market corrections are painful but healthy processes. They can burst some seemingly lucrative market bubbles and tone down inflated valuations.
A longer period of correction, or a downturn, can make funding conditions tougher for startups. Investors may especially refrain from putting money into cooling markets (Paul Cohn, Managing Partner at Tail End Capital Partners, provides an incisive answer to market corrections and startups on Quora).
Another reason to consider becoming a cockroach is that growth is not a one-way street, and timing is key. OYO learnt this the hard way, after its plans to expand globally went bust.
Its business model and global growth were hanging on by a thread, and then, hit by COVID-19, OYO had to eventually pause operations worldwide, furlough employees by the thousands, and default on minimum guarantees it made to hotel owners.
The hotel chain’s model worked well in the Indian market but it needed to switch to survival mode after it failed to click in international markets, a predicament exacerbated by the pandemic.
Growth is not intrinsically a bad strategy. Startup leadership will want to be careful to not pass up opportunities for growth just to stay true to the label of a cockroach startup. This is true especially for companies that are in bankable industries in the COVID-19 context, such as digital health, or remote productivity tools.
Yet, the OYO story demonstrates how risky it can be. Pushing for growth in a time for survival can leave founders, investors, and companies smarting. And that only makes the case stronger for startup cockroaches.
Now is a good time to go cockroach.
All the above holds true in the current global landscape, with economic stagnation and a looming recession, a stark VC landscape, and cash reserves running low. The pandemic has already made companies make tough decisions to survive, and OYO is not the only one to have taken a few steps back.
It makes sense for founders and CEOs of the rest to keep their noses to the grindstone, cut back on costs, focus on pitching solutions to transform market conditions, and figure out a way to make revenues on low fuel until profits or new investments arrive.
In Paul Graham’s precise words, “better to be small, ugly, and indestructible.”
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