Covid has presented a time of change for most. It combines many traits of the great economic depression in America, with the financial crisis of ‘08-’09.
When most of society is only paying for basic necessities of life due to lack of access from lockdown, this is almost identical to behaviour in an economic depression. Deleveraging then converges with suppressed consumer spending which unwinds debt. As Ray Dalio often describes it, this is a “painful process”. This point is potentially in front of us heading into the year’s end.
As more companies turn into question marks with regards to being “ongoing concerns” it poses an interesting strategic conundrum for startups.
Should startups now be focusing on how to offer B2C routes to market rather than B2B?
Europe loves B2B (and SaaS). I think this fact is accepted by most, and it has become a point of focus for many specialised funds in the EU looking to capitalise on this trend; however, is this trend set to continue?
During economic uncertainty and decline, corporates look to pull back on spending. This will have a knock-on effect, on a lag, for startups looking to create new projects. Although it can be counter-productive, corporates don’t invest in new initiatives, even though they can save them money over the medium term, because cash is constrained in the short term. When evaluating where to save cash, corporates often look at which contracts they can cancel instead of reducing permanent headcount and disposing of heavy equipment. B2B SaaS can often be an easy target.
So, if you’re a startup in this position where you can’t set up new partnerships, and in fact, some of your existing partnerships are even being cancelled — what do you do?
You’ll have to pull back on your own costs as well, obviously, but this will affect all of your own internal metrics. This will have an impact on your future fundraising efforts as it creates a “less rosy” picture for investors.
Especially in the unique situation with Covid — investors are looking for which startups are applicable to the “new economy”. More funding has gone into Work-From-Home (WFH) startups, Ed-tech, and other relevant segments than previous periods (when they were not as on-trend).
The other strategy is to see if you can create a B2C offering with what you have spent your time, effort and funding on to date. As I see it, this has many opportunities and benefits compared to B2B, especially now.
Consumers, especially European consumers, have a build-up of cash compared to pre-pandemic. This is due to the government support that has been provided, and mortgage holidays (compared to deferment in the US). Of course, if a wave of unemployment materialises, savings will possibly be used towards supporting lifestyles until individuals can gain employment again. However, there is still enhanced unemployment benefits in most EU countries currently as well, which means consumers may still spend.
Additionally, online shopping is at an all-time high rate of adoption. Consumers are at home, for the most part, wanting to increase their enjoyment through beautifying their surroundings and finding ways to entertain themselves. Most individuals are adapting easily to shopping at home and this is a trend that is set to continue.
Now, one of the most difficult challenges to B2B models is the sales cycle. Depending on what size organisation you’re targetting, the segment you’re operating in, and which particular solution you’re offering; startups can usually be looking at anywhere between 6–18 months sales process. Even then the project could be for a pilot that needs to be proved, rolled out, and scaled up before it truly becomes valuable.
B2C offers very attractive sales cycles, again, depending on several factors. Payment is also instant, compared to a B2B client. Not only will your cashflow improve, but your credit risk on accounts receivable will also decrease. As I said, many companies are becoming question marks on whether they can even pay you.
Another benefit? Feedback and actionable data. Consumers can be fountains of knowledge when it comes to receiving feedback, and many are forthcoming whether you prompt them directly or not. This can lead to better iterations in more frequent cycles.
How about the competition? B2C in Europe is underserved, in my opinion, and ripe for disruption. This is why many US companies are gaining traction, being virtually unchallenged (think Amazon).
Of course, there is the challenge of reaching your consumers and you’ll need to figure out your digital marketing strategy. Luckily there are many tools out there to help you overcome this challenge.
Overall, I think many entrepreneurs will come to the same conclusion as I have and ultimately we will see more startups pivot to consumers to supplement a decline in B2B sales.
