2020 has gone quickly from feast to famine in many industries: Airlines, F&B, and live events being especially hard hit. However, it’s not all bad with a number of industries experiencing increased growth as a result of the COVID-19 situation: Edtech, Medtech and eCommerce to name a few. Of course, startups can sit on either (or both) sides of this divide, and no matter which industry they are in it is often harder to raise investment capital given the current uncertainty and the economic climate. So what are some best practices for riding out the next few months or more if you’re a startup founder?
Don’t make short-term decisions that seem to save you money or otherwise de-risk your business but could cripple you in the medium to long-term. For a start, the most obvious of these is probably your largest expense: human capital. You will certainly need to perform a sober financial analysis about your current runway and expenses. Also, you probably need to discount your ability to raise cash in the short-term unless you are able to secure commitments from current investors (see next point).
However, letting go of good people in a crisis may not only weaken the company in the future but can hurt your culture and make you seem less loyal to your staff, who are often working longer hours for less pay than they could at another job. Also, be careful about strategic moves like moving entire offices to different geographies to save on costs. Ensure you fully understand the non-financial cost of moves like this for your business and their long-term effect on the company. Having said that…
After performing a sober analysis of your financial situation you may want to consider lowering expenses and/or raising your runway. If you have the option, the easiest option may be to reach out to existing investors and see if you can top up your cash with an extra 3-6 months of runway to ensure your startup can focus on the core business operations.
Another way to generate cash is to try and speed up receivables. If you have customers who owe you money (this usually works better for B2B startups), you can offer incentives for early payment to bring forward cash, something like “If you pay in the next 14 days we’ll give you a [5%/10%/ whatever] discount on your invoice”.
For B2C startups you could offer enhanced incentives to pay upfront for a year subscription to your monthly subscribers. Discounting can also work to drive in new business so you may consider a marketing campaign with discounting to drive new business. This has the added benefit that your competitors may be “hunkering down” and not spending on marketing as much, so your campaign may be more effective and/or less costly. But for this to be effective, do your research ahead of time and make sure your marketing campaign hits the right note.
If you need to cut costs, it gets a bit tricker. For startups there aren’t usually a lot of line items to cut besides staff. If you have any flexibility in your office situation (and it can add enough to your runway and not disrupt your team too much) then you might consider moving to a more flexible workspace (co-working) or to a distributed team (work from home or work from SBUX) situation. If this only saves you a few weeks of runway, it’s likely not worth the trouble. You can delay payment to suppliers, but that usually won’t get you too far before they start shutting off services…
As a last resort, you can think about cutting staffing costs. There are several options here, but the easiest is to ask staff to take a temporary “haircut” (reduction in salary to be paid back later in cash or in shares). Of course, if things get really tight, you may have to see if they will work without a paycheck for a period of time (this is not very sustainable and can cause major damage to a startup’s relationship with its employees). Another option would be to see if some staff could move to a temporary part-time status.
Again, the best path is to focus on increasing your runway rather than lowering your expenses, assuming you’re already running a lean and efficient operation. Cutting sales staff because sales are low due to temporary external factors can hurt you later when you need to ramp up sales and have to start from scratch.
Try to ensure you have at least twelve months of runway, with 18+ ideal. If you have less than six, you’ll need to go into survival mode and cut more than is ideal to ensure you can survive in the short term and “live to fight another day”. In any case, you need to...
Being a startup founder is already incredibly stressful without a global pandemic and projected recession, but you're going to have to step it up yet another notch to ensure your team feels safe and believes that your company has things under control. Some things you can do to ensure your team is mentally and physically prepared include:
Take a step back from the panic. Are there ways in which you can optimize your business in the current situation? What aspects of your business model might be useful to customers who are reacting to or experiencing dramatic changes in their lifestyle?
For example, online communication tools like Zoom, which has been scaling up, could raise more capital fairly easily (it’s stock price has gone dramatically up while the market has gone dramatically down), and recently offered free access to its platform for K-12 students.
Startups in industries like Edtech, Medtech and eCommerce are experiencing a large increase in demand for products. Even if you’re not in an obvious position to increase product demand, there are likely things that you can do to increase engagement with your customers. Think about things like:
Another course of action to consider is to re-prioritise your projects. If customers aren’t buying and your marketing is not effective you may consider moving your tech team to focus on technical debt, SEO clean up and enhancement. You could also prioritise a new feature if it’s particularly well-suited to the current environment.
It’s advisable to have a strategy meeting and do a full analysis of your business, especially from a financial and strategy perspective. Even if your cash position is completely fine it’s unlikely that the same strategy you were using several months ago is optimised for the current environment. In fact, if you have a good cash position you might consider raising your spending. This may seem counter-intuitive, but you may be able to gain resources more cheaply and depending on your business you may be in a position to take a greater market share.
Something to keep in mind is that some of the world’s most successful startups - Slack, Pinterest, WhatsApp - were built during or survived a major crisis. A downturn can expose inefficiencies in the market that can be long-term advantages for well-run companies. Often, startups that are well-funded, can crowd out competitors through large marketing budgets and other resource advantages even though they aren’t well managed.
In a downturn, when resources dry up, startups with less resources but that are better managed can stay alive longer and eventually surpass the previous leaders. As Warren Buffet remarked, “Only when the tide goes out do you see who’s been swimming naked”. So if you’ve ever thought “We’d be beating XYZ company, except for the fact that the founder has a rich family (or some other connection to resources)”, now’s your chance to test your theory: get out there!
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