How Singapore Startups Can Position Themselves for Recovery

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For many Singapore startups, COVID-19 will be a life-changing event. The upheaval caused by the virus will have a huge impact on many people’s livelihoods. Never before, for the past 3 decades, have whole industries shut down and consumer demand dropped so far so fast.

The economic implications are highly uncertain. The world economy is likely to experience a sharp downturn followed by a relatively slow recovery, as social distancing measures are kept in place for several months. It is likely the economy will shrink further in 2020 till 2021, and it would take until 2023 before economic activity would return to pre-crisis levels.

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For start-ups, the priority has never been clearer. The failures of unicorns like Theranos, 爱屋吉屋 to WeWork has exposed flaws in the business models. On top of that, the challenges of capital winter and now an economy that struggles to resume to normal, all points to the need to accept change in their respective business model.

Startups, unlike other businesses, may not have generated revenue yet. The priority for many founders is to keep employees and customers safe, even as the business environment deteriorates further. Faced with a rapidly changing business environment, startup founders must look beyond the immediate crisis and begin to think about possible paths to the next growth.

Startups can anticipate the challenge ahead and formulate their strategies by focusing on the following: patterns from previous recession, change in customer behaviour due to COVID-19, and the effects of lockdowns on different sectors.

Putting these together can help indicate to start-ups think through if their ideas and initial assumptions based on pre-crisis conditions are still valid. Many will have to hasten their restructuring, some will find a way to pivot and reinvent themselves as they seek to find their footing. Our conclusion is simple: startups that can stay nimble, focus on planning ahead with a view of the emerging trends is likely to emerge faster and be more resilient. For every economic crisis, new leaders and trends will develop and emerge to lead the economies to recovery and innovation breakthrough.

The similarities between dotcom and unicorns.

Bubbles are never strictly identical. Yet, there are striking similarities between the dotcom craze of the 1990s and today’s rearing of unicorns.

Twenty years ago, the Internet bubble peaked when the Nasdaq reached an all-time high of 5,048.62 on March 10, 2000. Globe.com, the social network of the day, which went IPO in 1998 and posted the highest one day gain of 606% (from US$9 to US$87). Its market cap was US$806 million. The company collapsed the next year. It never makes any money.

From yesteryears dot-com startups like Webvan, eToys to the unicorns today like WeWork, 爱屋吉屋, it is not unreasonable to draw parallels between the two. Customer acquisition costs is the key variable in their operating structure. Companies like Amazon, and Facebook eventually became profitable thanks to their large user base. Their path to break even relies on establishing market dominance.

In the case of 爱屋吉屋,it became a Chinese unicorn in less than 273 days. It burns through the funds it raised and lasted slightly more than 3 years before ultimately running out of cash.

Today, startups need to learn to bootstrap and be creative in growing their customer base and generating revenue. Capital winter has already arrived. Gone are the days where you can just raise funds because you have an idea.

Past recessions and recoveries tend to be consumer-led

Drawing from studies, past recessions and recoveries tend to be consumer-led. As economic conditions worsen, households cut back on spending. Already, we have seen announcements from companies on cost cutting measures. It varies from companies like car rental Hertz, to retailer Robinsons, homegrown food and beverage Breaktalk Group to fashion company Esprit. More is expected to come.

By contrast, recovery comes later for sectors producing mostly capital goods (including R&D, software development, databases and other forms of intellectual property). When a recession starts, many will still be completing customers orders for a while. However, as demand for consumer products and services declines, the effects start to be felt further upstream. Uncertainty from the economic slowdowns will result in capital investments being put on ice.

Likewise, when it comes to startups seeking venture capital funding, those that operate in undesirable sectors like Travel, Event Management may see that their requests be put on ice.

The same delayed dynamic repeats itself on the way out of recession. It takes time for demand to recover in B2B sectors even as consumer spending starts to improve. And especially for B2B sectors, where stocks have been depleted, an economic acceleration will mean intermediaries need to fulfill orders and build up inventory. However, this is true more for goods than services.

Changes in customer behaviour might outlast the crisis

The priority to save lives in the COVID-19 crisis has resulted in rapid changes that the government imposed on people’s behavior and perceptions. Businesses thinking about their post crisis positioning need to observe these trends closely.

Consumers are shifting to remote channels, and not just in retail. Historically, e-commerce has been adopted fastest in business-to-consumer (B2C) markets. The COVID-19 lockdowns have meant e-commerce is deepening and broadening—albeit unevenly, depending on the category and country.

Consumers are expected to reduce their spending in practically all product categories. At the same time, a significant proportion of their entertainment and grocery purchases is expected to be shifted to online.

The education and entertainment sectors are also seeing innovation and rapid adoption of remote technology. In Europe, most universities and many primary and secondary schools have shifted to online teaching. Even nightclubs have reinvented themselves by hosting stay-at-home parties. Organizers in Berlin now provide a virtual club service each night, “United We Stream.” After just two weeks, the site had recorded five million viewers. At the other end of the music spectrum, a performance in March of Geister (“Ghost”) by the Berlin State Opera, attracted 160,000 people.

Business customers for many kinds of services are accommodating remote delivery. Zoom, a leader in video communications, has seen their daily users surge 50% to 300 million back in April. And for the first time, an upcoming technology conference which has traditionally attracted many visitors is expected to take place virtually. These include Apple WWDC, Dell World, and many others—are expected to take place virtually.

With severe restrictions on movement, professional services are expected to be delivered remotely without either the suppliers or clients’ teams crossing borders. Given the savings in time and travel costs, it is unlikely that B2B sectors will fully snap back to previous practices.

Social distancing is affecting sectors differently

Will business operations change permanently? Or will companies return to their former ways of working when the crisis passes? The firm answer: it depends. With some suppliers under lockdown, companies have had to revamp their procurement routes to include alternative suppliers, or have been forced to use different inputs for their production processes. To mitigate supply shortages, customers of one Italian company are using 3-D-printed valves to support the manufacture of life-saving respiration equipment. 10 10. “Digital solutions in times of COVID-19,” European Digital SME Alliance, digitalsme.eu. In some cases, these changes will be temporary stopgaps; in others, companies will find that they have chanced upon an improved business formula and will stick to it.

For now, one aspect that is relatively easy to assess among sectors is how physical distancing has affected employees’ ability to work. There are two elements to this assessment. The first is to evaluate to what degree business as usual is compatible with physical distancing. For example, in places where people mostly work with machines, staying apart from others is relatively straightforward. For people working in offices, however, doing so may be more logistically difficult. And in occupations that take place in busy, crowded places, such as bars and restaurants, or that require physical contact, such as hair styling, working during the pandemic has been all but impossible. Postcrisis, there is likely to be heightened sensitivity to employee and customer safety; it is possible these concerns will change long-term working practices.

Second, in cases where remote working is necessary, some occupations and businesses can adapt readily—think of personal assistants, speech and language therapists, and software engineers. In others, the work location is more fixed; it is not feasible for a factory worker or a truck driver to work remotely. Exhibit 5 shows which sectors need to promote physical distances for safety reasons, combined with their ability to continue operating when they do so. This allows us to identify which industries have been disrupted most by employee-related challenges—namely (and not surprisingly), hospitality, construction, entertainment, retail, and personal services.

One fairly obvious implication is that businesses that have faced less operational disruption appear to be in a better position to return to normal more quickly. Perhaps more significantly, sectors with a larger gap between the ability and need to work remotely may be among the last ones to reopen, unless large-scale testing and tracing allows people to return to work. These sectors include hospitality, entertainment, construction, and retail. Regardless of when strict lockdown restrictions are lifted, different protocols will be needed—by location, sector, and employer—to minimize the spread of the virus until a vaccine is widely available. This in turn will weigh on late-to-open sectors’ cash flows and profitability and is likely to augur continued uncertainty and structural change.

Four ways to think about planning for the next normal

Two factors—the speed of recovery and the magnitude of structural change—will shape European recovery. Depending on how these play out, companies and sectors will, in broad terms, fall into four categories. No sector will fit any single archetype perfectly and every business will have its own idiosyncrasies. Nevertheless, we believe these cover most of the post-coronavirus landscape.

Bounce back. Sectors in this category have experienced limited fundamental change in the business environment and are likely to see customer demand return relatively quickly; examples could include food manufacturing, restaurants and bars, and many consumer goods, such as apparel, furniture, and cars. Companies in these sectors should focus on supporting employees’ return to work, consolidating customer and supplier relationships, and improving operational efficiency.

Lean in. These are sectors where demand is likely to recover relatively quickly but the lockdown period might prove to have permanently changed consumer behavior or ways of operating. Companies in this cluster should focus on “leaning in” to new practices, ways of working, and consumption patterns, specifically by rapidly reallocating capital and talent to support these changes. Retail, entertainment, and financial services likely fall into this category. There are also opportunities for significant transformations in health and education.

Restructure. These are sectors where the fundamentals haven’t changed significantly but demand growth and the restoration of supply chains will take some time to recover. These circumstances will prompt businesses to seek new ways to improve their cost-competitiveness; there may also be market consolidation. In recent recessions, extraction, basic materials, and some manufacturing sectors have fallen into this category, as well as construction and parts of transportation and storage.

Swerve. This is the most challenging category, comprised of sectors facing a slow recovery while also having to deal with fundamental changes in delivery modes and customer behavior. Surviving and thriving will require a complete reinvention of business models for the next normal. Among those likely to be affected are parts of the transport and tourism sectors, such as airlines and hotels, as well as many building- or office-related services, if there is a significant increase in remote office work.

The viability of start-ups’ business models will depend on the depth and length of the disruption in their sectors, and how effectively they plan ahead. Given the uncertainty ahead, start-ups should move towards a model that allows them to operate in a large addressable market, revenue-generating opportunities and a nimble bootstrap workforce.

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