More than a decade ago, George Arison and Toby Russell looked to be on the verge of success in the startup world.
They had made an app called Taxi Magic that people could use to call a cab, an idea that would later be popularized by Uber and Lyft. And they had secured a big corporate customer — the investment bank Lehman Brothers — with $500,000 in guaranteed revenue.
Weeks later, Lehman collapsed, helping to set off the 2008 financial crisis, and taking the taxi app with it.
So Arison and Russell had some perspective when the economy began to collapse again in March, threatening their new company, Shift, an online marketplace that brings used cars to customers' doorsteps for test drives. Arison and Russell are co-CEOs.
“I’m thinking back to those days, and thinking back to what things worked and what didn’t,” Russell said.
Before the global coronavirus pandemic, Shift had been flying high. It had raised nearly $300 million in funding from investors, with a fresh injection of cash coming last year, according to the investment-tracking website Crunchbase. It was even eyeing the possibility of achieving what the majority of startups only dream of: selling stock to the public in an IPO in 2021.
In a matter of weeks, Shift, with hundreds of employees, was having an entirely different conversation: Would the company have to shut down?
Even as businesses in many states resume some operations and the appetite for big purchases like cars begins to come back, startups like Shift are still largely at the mercy of larger trends and nationwide policies over which executives and employees have little control.
And even they can struggle to fully comprehend what’s next.
“I’m really confused by what’s happening in the disconnect between what’s happening in the stock market and what’s happening in the rest of the economy,” Arison said. “We really don’t have a very clear plan for how we get out of the environment we’re in."
Most of Silicon Valley’s startups, including Shift, have been turned upside-down by the past two months, as the twin crises of a global pandemic and an economic nosedive have devastated countless businesses such as restaurants and retail shops.
Tech startups almost by definition are always short on cash. The model is to raise enough money from venture capitalists to last maybe two years, and then spend the time developing products, hiring employees and finding customers without worrying at first about sales. And then repeat when cash runs low.
Shift wasn't broke, but it had been planning to raise money this summer, Russell said, before the coronavirus made that much more difficult.
Now, weeks later, the company has been through pay cuts, furloughs and a safety revamp, and executives believe they have turned a corner with a federal loan that will help the company make payroll — making it one of the relatively few tech startups making use of the small business loan program.
End of a growth era
The pandemic-downturn has been brutal on tech startups.
More than 45,000 people have been laid off from hundreds of startups, according to one count, while even tech companies that have kept their employees have often had to rewrite their business plans, furlough workers or find cash to shore up their finances.
A prominent venture capital firm compared the damage to the 1906 San Francisco earthquake, and the tremors are still coming even for more established tech companies. In the past week, Airbnb, Lyft and Uber said they were cutting about 6,600 jobs as the pandemic leveled the hospitality industry and reshaped transportation.
They and other tech firms could end up with radically different ambitions for the future.
“Imminent bankruptcy has a way of clarifying your priorities,” said Rich Boyle, a general partner at Canaan, a venture capital firm.
Boyle said the pandemic-induced downturn has echoes of the first dot-com bust of the early 2000s when many early internet companies ran out of cash or failed to adjust to changing circumstances, even if the two downturns have drastically different causes.
“It had the effect of washing out a lot of companies that weren’t well capitalized,” he said. “It had the effect of washing out a lot of companies where the founders were too slow to realize that the world had changed."
Many tech startup CEOs, though, weren’t around for earlier economic downturns. Some 82 percent of companies currently backed by venture capital were founded after the global financial crisis, according to a Silicon Valley Bank analysis. The bank said it hadn’t yet seen a meaningful fall in startup valuations, though it said it may be too early.
And with money flowing into the tech world in recent years, founders had been encouraged to hire at a rapid clip, said Joanna Rees, managing partner at the venture firm West. “Growth meant adding talent,” she said. “It’s been about how many more employees can we bring on to our team to demonstrate we’re growing?”
The case of Shift, based in San Francisco, offers a look at the stomach-churning roller-coaster ride that undid all of their planning.
Arison and Russell came up with the idea for the company together in 2013. Arison founded it that year, and Russell was appointed co-CEO in 2017. The two met during college in 1990s Vermont, where they went into business exporting American jeans to the former Soviet republic of Georgia.
Arison said that his earlier experience from the financial crisis seared into him the importance of having enough cash on hand for an emergency such as a recession.
“You cannot expect to always be in growth,” he said. “That’s not realistic.”
Shift was among the companies quietly preparing as reports first appeared of Americans being infected by the coronavirus. Arison said he was supposed to go to Asia in February to speak at a conference and meet investors and decided not to go partly because of the virus.
By the first week of March, when California declared a state of emergency but before lockdowns began, the company started to talk more intensely about what it would do, the executives said.
“There was a moment when we thought we would have to shut down entirely,” Russell said. “So crisis No. 1 was, how do we take our product and ensure it could be safe?”
Some tech startups no longer have a product to sell, or it has radically changed. Companies having to do with travel or hospitality, such as TripAdvisor or Away, or in-person activities like the exercise company ClassPass, faced challenges once states and localities ordered people to stay home.
Shift’s model, though, almost fits well with a quasi-lockdown: The company is based on bringing cars to people’s homes for test drives. It may have previously been a niche idea almost like a white-glove service — until everyone had to stay home.
To try to ease safety concerns among buyers, Shift has taken numerous steps including disinfecting every car before and after a test drive and applying an antimicrobial spray to reduce the spread of viruses and bacteria for years.
“We’re getting a lot of people coming to us saying, ‘You’re one of the few if only local options to buy a car safely,’” Russell said.
Beyond safety, the company faced a challenging financial situation.Though Shift raised $40 million in funding last year, Russell said the company was preparing to go back to investors once more this year — an idea that during an emergency might require paying huge amounts in loan interest or stock equity.
Shift’s board of directors met March 12, the day after actor Tom Hanks revealed that he had tested positive for the virus and the NBA canceled all games indefinitely.
Five days later, executives gave the news to employees at an all-hands meeting via Zoom: There would be pay cuts and furloughs, though no permanent job cuts. Shift slashed pay 25 percent for its 135 salaried employees and furloughed many hourly workers.
A couple hundred workers who were furloughed, at reduced or no pay, did retain their health benefits and the ability to come back to work quickly, the company said. That was more than 30 percent of the hourly staff, a group that includes mechanics, sales and customer service staff and “concierges,” the people who bring vehicles to potential buyers for test drives.
“It’s all demand-based, especially at this time,” said Dale Fredriks, 24, an hourly Shift employee in Los Angeles who said he’s been working extra hours for when people schedule test-drives. Some of his colleagues, though, remain on furlough.
The goal was to avoid layoffs, the executives said, and they have. “It felt like a crisis moment and a time to keep people together,” Russell said.
But there was also potential good news on the horizon: the federal Small Business Administration loan program, designed to preserve jobs.
The startup world initially wasn’t sure if venture-backed, frequently unprofitable firms would be eligible for the SBA loan program that Congress appeared to have intended for mom-and-pop businesses. The National Venture Capital Association and some startups, including Shift, sent letters asking the agency to clarify their position.
The loans are convertible to grants if a company meets certain requirements for maintaining its payroll. Shift applied and was approved.
“In our case, it is avoiding many, many more people losing their jobs, which is awesome,” Arison said. It also allowed Shift to restore temporary salary cuts to some salaried employees at its headquarters.Arison declined to say how much the loan was for, saying he hadn’t gotten approval from his board to release the number.
The road ahead
Like other businesses, Shift is having to rethink its market completely.
Months ago, it faced a relatively stable car business, but now the company is expecting upheaval: Rental car companies may sell off large parts of their fleets at auction, and they’ll be joined at auction by cars whose leases were up during the pandemic. Automakers may offer big discounts for new vehicles. Prices could fall.
“There are a lot of fleet cars out there that will be worthless very soon,” Arison said. “Rental car companies have thousands of cars, but their volume is down 80 percent.”
The company is also planning for a potentially big rebound in demand, as people who used to rely on mass transit or Uber or Lyft decide to buy used cars.
The used-car website business isn’t an open field. Besides traditional dealers, there are competitors such as Carvana, known for car vending machines, and New York-based Vroom. An earlier competitor, Beepi, didn’t make it.
Arison said he sees reasons for optimism, as Shift’s business has bounced back some from its low point in late March. As of late April, though, he said sales were still down from February by 15 to 20 percent.