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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

So what’s up with “Zoom fatigue”?

It’s a real thing. The science backs it up — there’s new research from Stanford University. So why is it that the technology can be so draining? Jeremy Bailenson with Stanford’s Virtual Human Interaction Lab puts it this way: “It’s like being in an elevator where everyone in the elevator stopped and looked right at us for the entire elevator ride at close-up.” Bailenson said turning off self-view and shrinking down the video window can make interactions feel more natural and less emotionally taxing.

How are Americans spending their money these days?

Economists are predicting that pent-up demand for certain goods and services is going to burst out all over as more people get vaccinated. A lot of people had to drastically change their spending in the pandemic because they lost jobs or had their hours cut. But at the same time, most consumers “are still feeling secure or optimistic about their finances,” according to Candace Corlett, president of WSL Strategic Retail, which regularly surveys shoppers. A lot of people enjoy browsing in stores, especially after months of forced online shopping. And another area expecting a post-pandemic boost: travel.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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