COVID-19

Startups always face bankruptcy risk. COVID-19 has made things worse.

David Brancaccio, Erika Soderstrom, and Alex Schroeder Apr 6, 2020
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Startups don't have the cash flow or credit lines to deal with crises like big companies do. Alex Wong/Getty Images
COVID-19

Startups always face bankruptcy risk. COVID-19 has made things worse.

David Brancaccio, Erika Soderstrom, and Alex Schroeder Apr 6, 2020
Startups don't have the cash flow or credit lines to deal with crises like big companies do. Alex Wong/Getty Images
HTML EMBED:
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While many startups are quickly pivoting their expertise to ventures that will help with this pandemic mess, the young, innovative companies have always been risky.

Erik Gordon, a professor at the University of Michigan’s Ross School of Business, told “Marketplace Morning Report” host David Brancaccio “they’re in probably the worst shape because they don’t have the resources big companies have.” The following is an edited transcript of their conversation.

Erik Gordon: Big companies have all kinds of cash on hand. And they have lines of credit, which are commitments by banks to send them money. Little companies always are living on the edge of near-bankruptcy. So this is very, very tough on them.

David Brancaccio: Can we look at history for a sense of where things may be going for some startups now?

Gordon: Yes, we can. And here’s what we’ll see. We’ll see that companies will cope. They’ll cope by slowing down what they can slow down. Maybe they’ll cut down the scope: Instead of trying to develop two products, they’ll try to develop one product. What they’re going to try to do is get their cash flow under control. That is, get control of the amount of cash that goes out the door every week, because they’re not going to have cash coming in.

Brancaccio: Now, I mean, if you’re a startup, you’re not going to get bailout money directly, right? That’s not how it works.

Gordon: No, I mean, the airlines will have no trouble getting their $50 billion. The company that needs $100,000 probably isn’t going to get it.

Brancaccio: Part of the difficulty here is that if you’re a startup, that implies it’s a risky venture, and we’ve just run into a whole lot of uncertainty and risk.

Gordon: You know, we forget about that side of risk. We talk about risk as if it’s some hypothetical thing, and it won’t happen. But it does happen. And it’s happening now. And small companies and a lot of us are getting a lesson in, “Risk is real.”

Brancaccio: I mean, it’s a shame at many levels — the human level, certainly. But, also, we’re going to lose some innovation here.

Gordon: That’s the sad part. We won’t know what we’ll have lost from these small, innovative companies. And some of the companies are working on drug development.

COVID-19 Economy FAQs

How many people are flying? Has traveled picked up?

Flying is starting to recover to levels the airline industry hasn’t seen in months. The Transportation Security Administration announced on Oct. 19 that it’s screened more than 1 million passengers on a single day — its highest number since March 17. The TSA also screened more than 6 million passengers last week, its highest weekly volume since the start of the COVID-19 pandemic. While travel is improving, the TSA announcement comes amid warnings that the U.S. is in the third wave of the coronavirus. There are now more than 8 million cases in the country, with more than 219,000 deaths.

How are Americans feeling about their finances?

Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.

Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.

What’s going to happen to retailers, especially with the holiday shopping season approaching?

A report out recently from the accounting consultancy BDO USA said 29 big retailers filed for bankruptcy protection through August. And if bankruptcies continue at that pace, the number could rival the bankruptcies of 2010, after the Great Recession. For retailers, the last three months of this year will be even more critical than usual for their survival as they look for some hope around the holidays.

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