You’re a startup founder. Maybe you think the proverbial sh*t is hitting the fan, maybe you think things are overblown. Whatever you think, the impact on the economy is real. Business and consumer spending are dropping, and investors are on edge. By now, most folks have read Sequoia’s missive about COVID-19 as the “Black Swan” event of 2020.
Hopefully, you know that you have to adjust to survive. I’ve seen all kinds of questions on this coming from founders around the world. Founders should get lean and agile so you can survive in the near-term and thrive in the long-term. To do that, you have to be super clear-eyed about the situation, your business, and yourself and be prepared to do the hard stuff, fast. But be empathetic, too! And no matter what, communicate clearly and honestly with all of your stakeholders.
Here are some specific tips for surviving in these tough times. Please note that there is no one-size-fits-all answer. You have to determine what works and doesn’t work for your business.
TL;DR CONSIDER GETTING TO 18 MONTHS OF RUNWAY ASAP
Why 18 months? Nobody knows how long this is going to last. Some suggest a June timeline, others suggest more than a year from now. Even after the world recovers, you’ll be among a number of survivors clamoring for funding. Good news though is that there will be a LOT of money looking for battle-tested founders with profitable startups.
So whatever the case, I suggest hoping for the best but planning for the worst.
Here’s how to get there:
1. Calculate what 18+ months’ runway means
Cash in the bank now literally means cash in the bank, not cash + receivables. You have to assume that some portion of your receivables will be uncollectible. If you have accounts receivable, keep laser-focused on collecting it. If you have investors who still owe you cash, call them up. Even if somebody defaults on you, you’d rather know now than when you’re down to your last cent.
(Reduced) sales forecasts. Don’t assume your revenue will grow on its current trajectory or even stay at the current levels. Look closely at your current customer base and think hard about which customers or customer segments might be experiencing pain. Maybe it’s hourly wage earners who are about to get cut. Maybe it’s a large airline SaaS client who is facing 90%+ drops in revenue. Add up the previously-forecasted revenue from those customers. Now assume you’ll lose two times (2X) that amount, to account for your blind spots and/or longer sales & collection cycles, etc.
Cash in bank + Reduced sales forecasts = M.
Now divide M by 18. That’s the approximate maximum expense you should plan for across all of your expense categories for 18 months. (Maximum because you should have a buffer for further unexpected expenses or revenue losses and because it would be even better if you could extend your runway further than 18 months).
So you see why the next step is…
2. Cut your burn HARD
This will be extremely painful, but the harder and sooner you cut expenses the better your startup’s chance of survival and the more pain you could avoid later. (If you think it would be hard to lay off 10% of your staff in the next few months, imagine how hard it would be to tell everyone they’re out of a job when your company goes under.)
Look carefully across your expense categories. Here are some ideas.
a. Payroll. For most founders, this is usually both the largest expense category as well as the one you’re most able to control, which unfortunately makes it a priority to look at.
As a general theme, I would suggest that you assess this realistically, but act with empathy.
The easiest place to start is halting increases in payroll by delaying all new hires (except mission-critical ones) and freezing current employees’ salaries.
After that, consider cutting headcount and/or compensation. This is a tradeoff: if you cut people, they will struggle. If you cut compensation, then everybody will struggle. Whatever the case, do the math and figure out what you need to do for your startup to survive. And if you cut headcounts or compensation, you should cut your own compensation as well to set an example and share the pain.
If you decide to cut headcount, prioritize cutting mediocre performers and bad culture fits. Then look at what functions might be outsourced. Do whatever you can to keep your great, versatile, no-ego performers.
If you decide to reduce compensation, think about different variations rather than simply a flat haircut across the board. You can consider one or a combination of things like cutting bonuses, asking employees to swap cash compensation for equity compensation, offering employees reduced work hours in exchange for compensation reductions, or building in time bounds for base compensation reductions (for example, “XX% cut while in a government-declared state of emergency, restore to normal levels once the declaration is lifted”).
Whatever you choose to do here, I would suggest you do it soon and do it all at once. You might be scared of the disruption that “tearing off the bandaid” will do, but that’s nothing compared with the agonizing death of seemingly haphazard cuts stretched over a long period.
b. Sales & marketing. Plan to cut these below a certain % of revenue. But don’t cut these expenses related to positive-contribution customers (see #3 below).
c. New business. Delay or cut new product or market launches. It usually takes a lot of upfront investment and time to get these profitable; it will take a lot longer during a pandemic. I don’t think it’s worth burning money here in the near-term.
d. Rent. If possible, reduce your rent obligation (some landlords are already forgiving rent obligations) or else end your office leases (tip: check your lease contract for a force majeure clause). In any case, it seems like we’re in for at least a few weeks of remote work.
After all that, you can also challenge your colleagues to find $100 or $1,000 of extra savings. You might be surprised by how much “spare change” people can identify.
3. Look for contribution (not just revenue)
When times are good, all you have to do is drive up revenue, costs be damned, and you can find investors who will throw money at you.
When investors are panicking and you have to survive, you have to focus on contribution. (Contribution is the amount of earnings after all direct costs are subtracted from revenue. Direct costs are any costs that vary directly with revenue: allocable marketing & advertising costs, sales commissions, fulfillment costs, etc.)
In other words, you should be earning revenue that at least covers the cost of obtaining and serving that revenue.
Focus on the activity that has the highest contribution margin. For many businesses, that’s often retaining existing customers. This is especially true in a time like this when otherwise potential new customers are too distracted and fearful to be introduced to new products & services.
Of course, not everything necessarily needs to be about revenue or contribution or profit. Acting with empathy and kindness in tough times can help people and improve their long-term loyalty. Here are a few of many examples I’ve seen lately:
- AirBnb is allowing full refunds, no cancellation fees, for all bookings worldwide.
- Coolmate.me (disclaimer: a portfolio company) is sending medical masks not only to customers who are completing orders now but to all past customers as well.
- Jason Lemkin (SaaStr) suggested voluntarily allowing customers to reduce seats upon their request and other customers to extend their free trials.
Compare these to the ill-thought-out changes in refund policy by United Airlines:
- Original: cash refund if your flight schedule is changed by at least 02 hours
- Change #1: cash refund if your flight schedule is changed by at least 25 hours (applied retroactively to previously-booked tickets as well)
- Change #2: cash refund on a case by case basis
- Change #3: cash refund if your flight schedule is changed by at least 06 hours (better!)
- Change #4: credit if your flight schedule is changed by at least 06 hours; if you do not use it within a year, then the credit can be converted to a cash refund.
Anyways, if you’re going to look for new customers, focus spending on your best-performing marketing channels and most profitable leads. (e.g. where you “get the most bang for your buck”). But do not assume your ROIs are going to be the same these days than they were last year! Monitor your numbers carefully.
Finally, a small note. I would be careful about using COVID-related content in sales & marketing. You can if you want (for example, if you’re in the business of healthcare); be careful if you do. Some founders have already had to walk-back distasteful attempts.
4. Raise money when you can
Financiers of all stripes are on edge. They’ll wrap up deals that are already almost finished but otherwise are trying to figure out what’s happening and what to do just as much as you are. Capital conservation is the name of the game for them.
Their first instinct will be to “circle the wagons” around existing portfolio company founders. If you are already one of those, then you will appreciate that.
Think carefully about whether you want to try to fundraise in this environment. Fundraising is substantially influenced by momentum — in your numbers, your market, and your investor demand. It’s highly likely that all three of these things are going to be against you. In the meantime, you could be spending that time and attention on other matters.
My perspective is that unless you are already close to closing a round and/or you are dangerously short (e.g. <6 months) of runway, you should take some time to get other aspects of your business together.
If you need financing fast, you could focus on two sets of sources:
a. Insiders (e.g. investors who have already invested in you before). Why? Just like it’s easier to retain an existing customer than to find and convert a new one, so too is it substantially easier to convince an insider to “re-up”. You had already convinced them about the attractiveness of your startup once before, and they are also already incentivized to keep you alive (i.e. they would want to protect their existing investment). However, don’t be over-reliant on this option: just like you may have had to make hard decisions about your team members, they may have to make hard decisions about their portfolio companies.
b. Lenders (factoring and other types of SME loans). Lending activity is likely to shrink drastically. What lending does happen will probably go mostly to larger, profitable companies. Still, if you need money for your business to survive, it may be worth a shot. There are a couple of categories of options:
- Traditional institutions like banks (of course) and nonbank lenders (Discover and American Express).
- Various fintech startups like Kabbage, Prospa, Hatch (disclaimer: a portfolio company), etc. have launched in recent years that can provide a small business loan in less than 24 hours.
Otherwise, you can use the time to strengthen your business and prepare for your future fundraising. Sync up your team, revise your fundraising story, clean up your product and collateral, start getting leads, etc.
Here are a few notes for when you do begin fundraising again:
- Expect that the whole process will take 2X longer. For example, in SE Asia where rounds typically take 3-6 months, you may want to budget 6-12 months.
- Prioritize getting a strong lead. Even in good times, investors are sheep. In bad times, they will be more so. The importance of having a branded lead investor with a clear conviction will be even more important.
- Learn in advance about the kinds of terms that investors during this period might seek: seniority in capital structures, higher liquidity preferences, etc.
Don’t let yourself get taken advantage of, but also don’t let yourself get held up by things like a valuation. (You may even have to accept a down round. Not great signaling for future rounds in a normal world, but the world is not normal anymore…)
Finally, a small note similar to the end of #3: I would be careful about using COVID-related content as a positive message in fundraising.
Again, these are not one-size-fits-all comments. And I can’t tell the future any better than anybody else. But having gone through the global financial crisis at the start of my career, I can say that in an uncertain & chaotic future, the lean and agile thrive.
Stay healthy, keep calm, and carry on!
Bonus: Here are some additional resources:
Chris McCann’s post, Now is the Time To Act
Dershing Lim on Staying Alive in Crisis
Krystel Leal’s catalog of Work From Home Tools
Eddie Thai is a Partner at 500 Startups focused on investing in Vietnam-connected startups. This post originally appeared here and has been reproduced here with permission.