HomeBlogFounder frenzy: COVID created a startup wave, here’s how to ride it

Founder frenzy: COVID created a startup wave, here’s how to ride it

The COVID-19 era has been characterized by countless surprises: Real estate booms, a sourdough craze, and now a drastic increase in the number of new startups entering the market.

That’s right: During a time when it would otherwise appear risky to start a business, more entrepreneurs have decided to get started on building a company of their own than in any recent year. Lockdowns gave many of us pause for thought. Time to consider what really makes us happy, and whether our current career is as fulfilling as we’d like. Many people have decided to take the leap towards their dreams. Others have made the best out of a bad situation (like being let go from their jobs), and charted a new path of their own.

In the United States, the number of new businesses started in 2020 rose by 24%[1] from the year prior. This represents the largest increase ever in history. And while some of those businesses might have begun as a short-term solution (i.e. to make ends meet during a time of unemployment), there is great potential for many to transition into a long-term venture. Today we’re going to take a look at the most important factors to consider when launching a business during the pandemic.

Analyze longevity
Many successful business ventures begin in answer to a problem. Businesses launched during COVID tend to share this in common as well. They’re filling in the gaps presented by a largely mobile workforce, or an overwhelmed health care system. But the key to longevity lies in understanding whether the problem your company solves will still exist once COVID is over. In fact, many of the most successful COVID startups have developed solutions that speak to problems that existed pre-COVID but have just been amplified by the pandemic.

Begin by looking at data from 2019 and earlier. Would your business have added value during this time? Next, take a look at what changed during COVID in order to make your business offering relevant. Post-COVID, will this need still exist?

Know your customers
42%[2] of failed startups cite a lack of market demand as the reason for their demise. Once you have an understanding of how the relevance of your offering will stand post-COVID, make time to get well acquainted with your customers. Identify how their needs will change once the pandemic is over and seek out ways to enhance your offering to meet those new needs. In order to maintain long-term success, your business needs to serve a passionate group of customers who will stay with you into the future.

Pivot when necessary
If you identify a potential problem with the future relevance of your offering, don’t be afraid to pivot. Remember, even consistently making 1 degree turns can significantly influence the direction of your company. You don’t need to dive in and change everything right away. Just keep an eye on the road ahead and make adjustments before you reach the problem.

Establish a structure
One of the most common mistakes entrepreneurs make is failing to structure the business in a manner that supports growth. Working with a trusted advisor like Zeifmans can help you to understand the best model to suit your company’s unique needs. Let’s take a brief look at some options:

Sole proprietorship

A sole proprietorship is the easiest and simplest way to start a business. Costs are minimal, and there is very little paperwork to be done. All income or loss from the operation is reported on your personal income tax return.

That being said, sole proprietorship does expose entrepreneurs to personal liability, and if business is profitable then the entrepreneur will be subject to a much higher rate of tax than would be payable by a corporation. For businesses that are still in the growth phase and needing to re-invest profit back into the business, this taxation may become a serious issue.

Once a sole proprietorship expands its operations, it is often desirable to bring a partner on board. A partnership usually begins with a legal contract that summarizes the terms, including profit-sharing and the rights and obligations of the partners.

Similar to a sole proprietorship, a partnership is not a separate legal entity, and as such the partners remain personally exposed to business risks. All profits and losses need to be reported on the partners’ personal tax return at the agreed upon profit sharing rates, which again limits the partners’ ability to re-invest the money in the growth of the business.

A corporation is a distinct legal entity that separates the business from its owners. You can choose to incorporate federally or provincially; each option comes with its own advantages and disadvantages. Regardless of where you choose to incorporate, the benefits of incorporation will include limited liability and lower corporate tax rates. This extra cash flow allows entrepreneurs to invest in the growth of their start-up at a much higher rate than non-incorporated entities.

Raising money is often easier for corporations than it is for other forms of business. For example, your corporation has the option of issuing share certificates to investors. Other types of businesses must rely solely on their own money and loans for capital, limiting the ability of the business to expand.

Multi-tier corporations
As a business grows and expands, the corporate structure should adapt as well. In some cases, it makes business and operational sense to establish subsidiary and holding companies. One of the benefits of having a multi-tier structure is that liabilities and risk exposures can be compartmentalized and significant corporate assets such as intellectual property can be shielded from those risks.

Examine employee retention and attraction
Once your company is structured for growth, attracting and retaining talent often becomes a focus. The good news is that particularly for startups and tech companies, salary isn’t the only factor that keeps employees coming back for more. Company equity, corporate culture, work-life balance, remote working options, and health and wellness perks are all areas to consider as well. To learn more, read our blog on employee compensation.

Explore M&A
Another COVID surprise? The second half of 2020 saw M&A valuations soar, with deal volumes increasing by 18% and values increasing by 94%[3] as compared to the first half of the year. Tech and telecom sectors experienced the highest growth. Interestingly, non-traditional sources of value creation are increasingly being factored into decision making. Qualities like environmental impact and social factors are being touted as key.

While not all sectors saw a boom, and there are undoubtedly COVID-specific factors to consider (example: interest rates and more conservative lending availability), M&A activity has continued with surprising vigor.

Prepare for success
If you’re taking the time to plan, why not plan for the best possible scenario? If you set up a foundation that allows for growth, there will be nothing holding you back as your business encounters an increasing amount of success.

Accounting systems
Take the time to set up accounting systems that will support your growth. Sure, you may only have a handful of clients now, but if your business explodes, can your accounting handle the increase? Plan ahead and you’ll be glad you did.

Accounting framework
If you decide to go public in the future, or include your financial statements in a public document, you’ll want the financial statements to be in accordance with IFRS. Otherwise, you can prepare the financial statements under ASPE for simplicity.

In the event of a future IPO, it makes sense to prepare early with annual audits. Audited statements will be necessary to go public or for a strategic transaction.

Tax structure
Create the optimal tax structure from the beginning, when valuations are low. This way you’ll avoid undue complications and significant tax implications as the company grows.

Learn more from the experts
If you’ve started a business during this unique time in financial history, or are perhaps considering starting a business, reach out to our team today. Together, we can discuss the best corporate structure to suit your needs and assist you in establishing a wealth optimization plan that will maintain your success into the future.

[1] New York Times, “Surge in startups is a surprise in the pandemic economy”, https://www.nytimes.com/2021/02/17/business/pandemic-entrepreneurs.html

[2] HBR, “Turn your COVID-19 solution into a viable business”, https://hbr.org/2020/07/turn-your-covid-19-solution-into-a-viable-business

[3] Newswire, “M&A valuations boom in the second half of 2020 despite COVID-19 impacts on the economy”, https://www.newswire.ca/news-releases/m-amp-a-valuations-boom-in-the-second-half-of-2020-despite-covid-19-impacts-on-the-economy-according-to-pwc-845626269.html

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