Tech Transfer eNews Blog

With university start-up investments scarce in COVID times, find ways to pivot

By David Schwartz
Published: May 19th, 2020

A detailed article on supporting university start-ups through the current economic conditions appears in the May issue of Technology Transfer Tactics. For subscription details, click here.

The COVID-19 pandemic is affecting the prospects and bottom line of university start-ups as they find investments difficult to come by and their usual work coming to a halt with the rest of the economy. Some are pivoting to other work in the meantime, but the effects of the pandemic are likely to hurt many start-ups for months, if not longer.

Funding has become a serious problem for many start-ups, says Tyson Benson, JD, a patent attorney with the law firm of Harness Dickey in Detroit, MI. With the economy slowing to a crawl and massive losses in the stock market, investors are not eager to take a risk on start-ups, he says.

About 35% to 50% of investment sources are no longer available to start-ups, he says. “Series A, Series B, those types of investment rounds are starting to get tougher out there because funding is drying up. What that means is that you’re going to have start-ups that have to figure out how to burn less cash,” Benson says. “Some of the ways to do that are through employee retention policies, possibly some exchange in equity in order to prevent cash going out the door. They may want to take a look at their business models, particularly those that are on the lower end in a highly competitive marketplace.”

In a market that has many start-ups offering apps, for instance, a start-up with moderate or lower market share might have to reevaluate its approach and change the product in some way that more clearly sets it apart from competitors, he says.

“In a time when funding is so scarce, you may not receive the same funding as your competitors with a better market share or better branding,” Benson says. “With everyone chasing the same few dollars, the companies that have already established themselves as viable are going to fare better than a start-up that might be up and coming but still needs more time to establish itself.”

Start-ups also must protect their IP, but some tough calls may be necessary, Benson says. When deploying capital to sustain the business model, it may be necessary to cut from the IP budget, he says.

“That may mean potentially not filing any patent applications, or filing one patient application when you should have filed two or three,” he says. “Trademarks are the same way, because each of those instances requires capital.”

But Benson says start-ups can still fare well in a hard economy. He reflects back on the economic downturn of 2007 to 2009, noting that start-ups were still able to find their footing during that Great Recession, growing through slow times and ready when the market started to thrive again.

“There were a number of unicorns that came out of that recession. Airbnb was one that rose from that recession,” Benson observes. “The founders were having trouble making rent at the time, and that’s how they developed the Airbnb concept. So start-ups can be successful in this environment.”

But new ventures will have to be able to prove their success and promise with more metrics than might previously been expected, he cautions. Most are responding as well as can be expected, he says, because the pandemic is such a black swan event that it was difficult for anyone to have a response plan.

“There are some start-ups that are handling it better than others. The successful start-ups are the ones reducing the cash burn,” Benson comments. “Typically about 30% of start-ups live on about three months of start-up capital and then they have to get replenished again. Now I’m seeing statistics that take number up to 50% running on capital that only provides a few months of leeway.”

That means those start-ups will have to find new capital in next few months or make drastic changes to strategy. The only other alternative may be to close the doors, Benson says.

“You have to change your business model or find a way to pivot to another business model,” he says. “You might be one of those left for dead if you’re not pivoting quickly enough.”

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