The How-To: Score Your Business's Preparedness For The COVID-19 Crisis (And Its Aftermath) When the COVID-19 crisis struck, investors realized they needed to understand whether their portfolio and pipeline companies were ready to outlast the economic uncertainty created by the pandemic.
By Heather Henyon •
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As a venture investor, we are used to talking about whether a startup is "investment ready," i.e. ready to accept outside capital. However, when the COVID-19 crisis struck, we quickly realized that we needed to also understand whether our portfolio and pipeline companies were ready to outlast the economic uncertainty created by the pandemic. More importantly, how could we as investors support them?
It is in response to this question that we at Mindshift Capital developed the Mindshift Capital COVID-19 Readiness Scorecard as a tool for founders to score their company's preparedness for COVID-19 and its aftermath. Entrepreneurs can use it to assess each of their business areas and determine which ones may be at risk. While the Scorecard is useful for investors as a quick snapshot, especially when managing a portfolio, it is equally useful to founders as a diagnostic to assess risk objectively on both the overall business, as well as individual areas. We have found that some of our portfolio companies have discovered risks that were unknown to them and not entirely obvious– for example, supply chain weaknesses that need to be monitored and addressed.
Even though economies are starting to open, the coming period will remain difficult until a reliable vaccination for the novel coronavirus is accessible. We are making our Scorecard available to all founders to help them during these challenging times. The Scorecard is available to download here, and it makes use of a simple range of 1-3 to determine whether the business area is in one of the following ratings:
- 1: Low COVID-19 readiness
- 2: Medium COVID19 readiness
- 3: High COVID19 readiness
The scores are then averaged to calculate an overall business score. Here's a deep-dive into each of the factors considered for this Scorecard:
1. PLANNING While many startups don't feel that they can plan during the COVID-19 crisis, that's not true. There are some things within our control, and some things that aren't. Data and information are changing daily around COVID-19 cases, lockdown, working from home, economic shocks, second waves, and government policies. However, we can create scenarios based on factors that we can control and ones that we can't (American VC firm Sequoia published an amazing tool that one of their portfolio companies developed– it is included with our download). We absolutely should be modifying our 12-month annual plan based on COVID-19, and we should also create contingency plans with very clearly defined triggers. (For instance, if a lockdown is going to last six months, then we need to cut expenses by 15% to ensure that we have 12 months of cash runway).
Then, once the trigger occurs, we need to act immediately to implement Plan B. Governance and oversight can help to ensure that this happens. The Board of Directors should be very active during this period of uncertainty. Directors have fiduciary responsibility, meaning that they act in the company's best interests rather than their own. The decision to furlough or lay off staff may be difficult for management, but the Board needs to ensure that costs are being cut so that the company can survive. Fortune 500 corporate boards are meeting weekly; our recommendation is that startup bnoards meet monthly with one-on-one check-ins as needed.
2. COMMUNICATIONS Communicate, communicate, communicate! We need to communicate even more during this remote time to everyone– employees, customers, investors and stakeholders. This is a great time to leverage social media platforms and increase newsletters and webinars. By now, most companies have written a letter to their customers and investors to share what they are doing in response to COVID-19. If not, do it now- and continue to keep them updated.
3. CASH FLOW Cash is king. One of the most critical measures that startups can take during this period is to extend cash runway. Ideally, companies will increase runway to 24 months. This isn't easy especially if one is in the midst of a funding round, or if one is just starting out. While we know that metrics in the industry have changed from growth at any cost to one where sustainability and revenues will prove to be more important, it's important to ensure that you are still around when there is an uptick in the economy. Survival is the new growth.
Cut variable spending and burn rate as much as possible. Data from past economic downturns in 2001 and 2008 suggest that the startups that were able to make large, fast cuts were the ones that survived. Unicorns like Carta and Opendoor have announced lay-offs of 20-30% of their staff. At the same time, negotiate rental contracts, legal agreements, supplier contracts– nothing is immune from deferral or renegotiation.
Fundraising is tricky in this environment. Many investors (VCs and angels) aren't investing in new companies until there is more certainty about what "the new world" looks like. The best option is to reopen a previous funding round (if less than six months ago) and invite insiders (previous investors) to commit additional funds. Many investors are keeping dry powder on hand to support their portfolio companies through this challenging period.
4. SALES Sales is an obvious area to be affected by the pandemic and economic recession. The rapid changes in consumer habits have severely affected certain industries like travel tech, mobility, and food delivery. It is more critical than ever to maintain an active sales pipeline, and be honest with oneself about likely conversion rates. Companies with strong sales prospects and high conversion rates are in the best position to outlast the pandemic and recession. If sales are deteriorating, try to pivot to other models in order to generate revenue quickly. Iterate, iterate, iterate.
5. SUPPLY CHAIN AND LOGISTICS Companies like e-commerce platforms are very reliant on suppliers; however, surprisingly, even fintech companies have faced supply chain issues that weren't obvious before using the Scorecard. Relying on one provider during COVID-19 times is risky; better to diversify where possible. Localized and near-shore options are the best, because there is greater visibility of delivery times and information. The challenge with stocking up on inventory is liquidity.
6. HUMAN RESOURCES While no one wants to let go of valued team members, many companies have laid off employees in order to cut costs. Other options are salary cuts, unpaid leave, and deferred salaries. Some companies are finding creative solutions, like job sharing an employee who might not be critical until a target market opens, but may be useful to a grocery e-commerce platform experiencing order surges. It is important to be very clear with employees about the status of the company, and for management to be as transparent as possible. Don't drip feed salary cuts or lay-offs– try to do it once so as to preserve culture. Job insecurity is a source of stress for many.
7. MARKETING This is the time for scrappy, grassroots (i.e. free) marketing like webinars and newsletters in order to build brands and acquire customers. Marketing spend might not be a good investment in an environment where retail spending is down and customers are conserving cash. It's best to spend scarce marketing funds during a time when return on investment (ROI) is high. Companies that revise their marketing plans as needed are the ones that will come out on top.
