For startups, this period of the COVID-19 will be a particularly difficult time. Although it is said that great startups are often created during market downturns, sometimes, easier said than done. So here are top 8 suggestions on how a startup is likely to survive economic crisis during this pandemic:
This is a pretty obvious and important step. If you don’t survive, there will be no doubt about the failure of your startup. So all of the strategies below are about survival. It is time to put aside the wonderful plans to become a huge company with world-beating products. None of this matters if you don’t survive. In order to survive, you will then begin to put the below into consideration.
2. Cash is king
Startups don’t generally die for a lack of ideas. They die because they run out of cash. Put in place a plan to conserve cash. Be aggressive in this plan; early action will be much more impactful than later action. Have at least 12 months of cash on hand, because it is likely that is what you will need. Even if the COVID-19 crisis resolves itself much sooner than that, the turmoil left in its wake will persist, particularly for a startup.
3. Forget about raising money
Angels will continue to invest, but expect smaller rounds, at a lower valuation, in companies that don’t require large amounts of cash. For existing portfolio companies, the sudden downturn in the market, coupled with the disruption of almost all business, as usual, will cause fundings to stall. While VCs and angel investors might have the cash to invest, the pullback will trigger a triage mode, where investments will be in select companies.
Even some good companies won’t get financed. Assume that this pullback will last until after the COVID-19 crisis is over and add a few months to that for them to get back on their feet. M&A will dry up; if you were in discussions last month, expect that nothing will happen until this crisis ends. If you are lucky, you might get your existing angel investors to help carry you a bit, but expect it to be really costly and only if you have a plan to make the money last a long time. And, as I believe is always prudent, communicate well with your shareholders, giving them the bad news and the good.
4. Revenue is likely to be curtailed
If you are counting on contracts in the pipeline to close, you shouldn’t. Most big companies, government clients, and especially small and medium businesses will also go into survival mode. Unless you are supplying a product or service that they consider absolutely mission-critical, you should expect that revenue will be deferred for at least six months and probably longer. If your existing contracts have cancellation clauses, expect that some will be exercised. If you have a way to shift some or all of your business to be part of a solution to the COVID-19 problem, stay alert to do so.
While there will be great economic dislocation that affects small and large businesses, there are still some opportunities, especially for direct-to-consumer businesses. People are sheltering at home and online a lot. If you are selling something that will make their lives better during this difficult period, there are opportunities. Examples might be things like online learning or classes, online consulting, or even things that bring a smile in these difficult times. Similarly, any product or service that makes working from home easier will have a ready market (if your customers can find you online).
While this is a really difficult decision, survival is the single most important thing. Many companies will have to pare back to the essential. Salaries will need to be slashed (as they were in 2000 and 2008) if companies will survive. I’ve already heard from several of my portfolio companies that they had company-wide meetings and agreed to 50 percent salary cuts.
While the pandemic will certainly curtail travel, make that a policy. Cut all contract help that can be cut. Cut marketing and sales spend until your customers are back to work and buying once more. Again, any step that cuts your burn early on, will have a lasting impact on the later cash balance and your cash horizon.
7. Non-equity cash raise
Look for sources of cash that are non-equity. Think of ways to get government grants. Explore the SBA programs that have been put in place to help small businesses. Be creative about finding sources of cash to stay alive, including potentially doing some short-term deals that help the immediate crunch. These are things that you would never have considered doing three months ago.
8. Stay alert for the inflection point
As with almost all things in life, this too will pass. It is hard to tell what the country and market will look like when this is passed, but if your company is alive and flexible, there will be great opportunities. Watch for it, since none of us can predict when it will happen.