Keeping Your Company Afloat During Coronavirus Crisis
The road ahead for start-ups will be a forbidding one, but there exists a playbook that can be employed to try and adapt to these uncertain times.
The Coronavirus crisis is not just a health emergency. It has also plunged the world into another financial meltdown. According to the International Monetary Fund, the downturn triggered by the coronavirus pandemic will be “way worse” than the global financial crisis of 2008. For start-ups, that translates into an unrelenting pressure to reduce expenses, depressed funding opportunities, and an increased focus on profitability from the word go. As someone who has battled several crises over the past two decades, the arc of the current crisis — and its impact on the global financial markets — is eerily familiar. As evidenced by both the LTCM (1998) and Lehman Brothers crises (2008), the first casualty in the wider financial markets will be liquidity followed by a spike in volatility, both of which will lead to massive arbitrage opportunities. In the next 12 months, start-ups across the world will have to negotiate an increasingly demanding environment. The road ahead for start-ups will be a forbidding one, but there exists a playbook that can be employed to try and adapt to these uncertain times.
Managing Your Cash Runway
It is imperative to extend your company’s runway. That means having a handle on current and future expenses, managing your payment cycles and realising revenue as soon as possible. That, of course, is easier said than done, but real time projections and the ability to mine data for ROI metrics will help make informed decisions. A clearer roadmap will help earn the trust of investors, who will be increasingly parsimonious — and justifiably so — with their money. A strategic shift in operations will have to be undertaken. That means customer retention over customer acquisition, an increased focus on wallet share rather than market share, and stability and consistency in your metrics as opposed to headline-grabbing gimmicks. ‘One-time’ deals and offers to broaden your customer base without a clear focus on retention will have to chucked out the window.
Dealing With Down Rounds
The funding drought will contribute to a rise in arbitrariness with respect to valuations. The pool of investors that start-ups can tap into as well as deal sizes will contract drastically. Early and seed-stage funding, which has thus far been the domain of angel investors, has already dried up, and start-ups will have to cast their net wider and aim to rope in institutional investors as early as possible. The latter will be more open to backing companies that can adapt better and faster to a post-crisis world and identify and create targeted solutions. While ed-tech and drone delivery solutions have been talked about, the challenge will be to come up with ideas that can help customers adapt to a world that will, at least for the foreseeable future, see restrictions on commutes, long distance travel and discourage social interactions. For example, VR could get a boost in the entertainment space, or, with increased time on their hands, one could possibly expect a DIY-centric approach to products. The new culinary experience could hinge on an acclaimed chef first dispatching ingredients to your home and then getting on a video call to prepare the meal with you.
Mergers And Acquisitions
Collaborations could emerge as the new survival tactic. Start-ups would do well to seek out like-minded partners, accept lower profit margins in return for mutually beneficial deals and eventual access to a larger balance sheet and customer base. This way, larger firms may not need to furlough employees, while smaller start-ups gain immediate access to talent and experience. A large consumer brand could use its sales and marketing channels to promote a sustainable solution developed by a start-up and help them gain the trust of their customer base.
If the underlying strategy has potential, start-ups should make a strong case and accept a bail out. This is better than folding and in turn creating a domino effect that affects the entire industry. For VCs, a bail-out, while risky, has tremendous potential to outperform in the long run. This should be a strategic tool that could be employed to generate outsize returns and capture alpha that others shy away from. In 1998, the 13 banks who bailed out the Connecticut-headquartered LTCM all eventually made over 30 percent on their investment beating every other index out there.
If you are a start-up, the message is quite clear. Only those with experienced management, tightly run operations and an ability to act and respond fast will emerge as frontrunners. These are unprecedented times, but innovation with a single-minded focus on profitability has never failed in any environment.