Startups are standing up to the challenges of COVID-19

Standing up a new business is never easy. There’s convincing investors and/or lenders to buy in, then corralling a few people to embrace the idea that a paycheck might turn into a payoff down the road and then convincing skeptical business owners to be customers. After that, whether the business is a hair salon or an app, the entrepreneur has to deliver on all those promises. And now, of course, there’s working around a pandemic that’s choking the economy.

Young businesses are struggling. Entrepreneurs who thought they had raised enough money to last until the next plateau was reached are having to revise their plans. The key for many, said one investor, is stretching the amount of time a company has until it runs out of money.

It’s not all bad news. Some young companies are growing and hiring. It also appears that the new-money spigot hasn’t been turned off entirely as the economy soured.

There are several venture firms and small business advisers in the region that can help companies over this hump if they need it, said Todd Federman, managing director of North Coast Ventures, an investment fund that focuses on early-stage companies.

“There are two different worlds for startup founders right now,” he said. “For some, it’s just been a destabilizing event, personally and professionally, and it’s taken them drastically off course as far as accessing capital, continuing with their plans to build and sell a product. And for others, for various reasons, it’s just been a little speed bump.”

Federman said that while one company in the North Coast Ventures portfolio has seen sales drop 95%, another portfolio company had its sales double from March to April.

“There are companies where their customers need them more and there are companies where customers need them less,” he observed. “One of our (portfolio) companies, Remesh, for example, does web-based focus groups. So if you’re a company and you want to put together a focus group, you’re not going to get 15 people in a room right now, but you can have a Remesh focus group tomorrow.”

Another encouraging story comes from Monarch Teaching Technologies Inc., based in Cleveland’s Midtown. Growing out of a nonprofit that assists children with autism, Monarch has developed an app, Vizzle, for online learning for students in special education. It raised money from JumpStart and others in 2017 for product development and to bolster its sales and marketing program.

“Now that schools are closed, teachers were scrambling to find digital solutions specifically for special needs children,” said Hardik Desai, a senior partner for investing at JumpStart, in a telephone interview at the end of April. “Literally in the last four to six weeks, they have added 4,000 teachers, double the number of teachers on the platform.”

Another JumpStart portfolio company, Wisr, also is in the online education space. Wisr’s technology helps college and university admissions departments stay in touch with admitted students, and Desai said it’s hiring.

“(Wisr) is seeing great, great growth in the current environment because its product is suited for remote communication, but they were a small team and they needed to have more people,” he said. “Our talent team jumped in and started recruiting for Wisr, and we filled a couple positions on the software side for them in a very short period of time.”

Not every young company, though, has a product that the current climate nurtures. Desai’s team at JumpStart, as at other venture funders, is working to advise struggling companies and find ways to help them survive.

“We are trying to be honest, we are trying to be upfront with them, that we are here as a resource to do anything and everything we can to help them,” he said. “In a handful of cases, the management teams have begun doing reductions in payroll, particularly beginning with the leadership teams, and they are working on interim bridge funding working with their investors. The other thing we have done is we have looked at the federal programs and if any of our companies can benefit from them. A handful of them do and they have applied.”

Although the economy is not likely to brighten soon and investors may be more wary than usual, they haven’t stopped writing checks.

In a JumpStart webinar on April 23, “Raising Capital in the Midst of COVID,” investor Morris Wheeler, founder and principal of Drummond Road Capital in Shaker Heights, offered encouragement to entrepreneurs who are looking for money to extend the time they have to turn their startup into a revenue generator — what the investment community calls “runway.”

“There are a number of new deals that have been placed, and the deal flow has been, I would say, typical to strong in terms of the number of deals that we’re seeing,” said Wheeler. “If there is anything that makes a company feel better during a period of uncertainty, it’s runway. I would guess that probably like 20% or 30% of our existing portfolio companies that are still in early-stage are going back out to the markets to try to build additional runway.”

The advisers also have recommended that some of their portfolio companies pursue forgivable Paycheck Protection Program (PPP) loans, under the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. Desai said several have gotten federal money, while several others have not.

This article originally appeared in Crains Cleveland Business on May 10, 2020.

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