"Winter is coming."
It is the only blog post I hope to be completely wrong about.
With the Covid-19 virus, a global pandemic, if you're running a startup or a small business, you have to ask yourself, "What's Plan B?" And what is in my lifeboat? "
Here are some thoughts on functioning in the uncertainty of a pandemic.
Social isolation and a declared national emergency have had an immediate impact on industries that bring people together; conferences, trade shows, airlines / cruise ships and all types of travel, hospitality industry, sporting events, theater and cinema, restaurants and schools. Large companies send employees to work at home. The big retail chains are closing their stores. While the impact on small businesses and workers in the "gig-economy" has not made the headlines, it will be worse for them. They have less cash reserves and less margin of error to handle sudden downturns. The ripple and feedback effect of all these closings will have a major impact on our economy, as each affected industry puts people out of work and laid-off workers do not buy products and services.
This is no longer as usual for the rest of the economy. In fact, the shutdown of the economy for a pandemic never happened. Millions of jobs could be lost over the next few months, as whole industries are devastated, which has not been observed since the Great Depression of 1929-1939. I hope I am very wrong, but the social and economic effects of this virus are likely to be profound and will change the way we shop, travel and work. for years.
If you run a startup or a small business, your first priority (after your family) is to keep your employees and customers safe. But the next question is, "What happens to my business?"
The questions that every CEO of a start-up or small business should ask themselves are:
- What is my burning speed and track?
- What does your new business model look like?
- Is this a three month, one year or three year problem?
- What will my investors do?
Burning rate and track
To answer the first question, take stock of your gross burn rate that is, how much money do you spend each month. How much are fixed expenses (those that you cannot change, ie rent?) And how much are variable expenses (salaries, consultants, commissions, travel, AWS / Azure fees, supplies, etc. .?)
Then take a look at your real income every month – no forecast, but actual revenue coming each month. If you are a start-up business, this number may be zero.
Subtract your monthly gross burn rate from your monthly income to get your net burn rate. If you earn more money than you spend, you have positive results cash flow. If you are a startup and have less income than your expenses, this number is negative and represents the amount of money your business is losing ("burning") each month. Now take a look at your bank account. See how many months your business can survive by spending this amount each month. This is your track – the time available to your business before you run out of money. This calculation works on a normal market…
The world upside down
Unfortunately, this is no longer a normal market.
- All your assumptions about customers, the sales cycle, and most importantly, revenue, burn rate, and lead are no longer true.
- If you are a startup, you have probably calculated that your lead would last until you increase your next funding cycle. Assuming there was going to be a next round. This may no longer be true.
What does my business model look like now?
Since today’s world is no longer the same as it was a month ago and will likely be worse in a month, if your business model is the same as at the beginning of the month, you are in denial – and possibly bankrupt.
It is the nature of the CEOs of startups to be optimistic, but you need to quickly test your assumptions about customers and revenues. If you sell to businesses (a B2B market), have your customers' sales decreased? Are your customers closing for the next few weeks? Laying off people? If so, whatever revenue forecasts and sales cycle estimates you had, they are no longer valid. If you sell directly to consumers (a B-to-C market) were you in a multi-sided market (consumers use the product, but others pay you for their eyeballs / data?) These assumptions on the payers always correct? How do you know?
What are the new financial metrics? Receivables – control them. Cash days?
You need to determine your actual burn rate and your track in this new environment now.
Is this a three month, one year or three year problem?
Then you need to take a deep breath and ask: is it a three month problem, a year problem or a three year problem? Are the business closings going to be a temporary downturn in the economy or will they drag the US and Europe into a long recession?
If it is only three months (which seems more unlikely day by day), an immediate freeze on variable expenses (hiring, marketing, travel, etc.) is necessary. But if the effects are going to spill over into the economy longer, you need to start reconfiguring your business. You need a rescue strategy. It's a fancy phrase to figure out what are the minimum things you need to keep your business alive and what to leave behind.
A one-year problem means taking a knife to your burn rate (layoffs and elimination of benefits and programs to reduce your variable expenses,) renegotiating what previously seemed like fixed expenses (rent, rental payments ; equipment, etc.) and put only the essentials of survival in the lifeboat.
If you are selling online or in person, you may have an advantage (assuming your customers are still there.) Or you change your sales strategy.
Whatever your product / market, last month it is no longer true and must change to meet the new standard. Does this open up new value propositions or kill others? Modify the product?
What if it's a three year problem? Then you not only have to give up everything that is not essential for survival, but it probably requires a new business model. In the short term, explore if part of your business model can be oriented around the new rules of social isolation. Can your product be sold, delivered or manufactured online? Does it have advantages if it is delivered this way? (See advice from Sequoia Capital here.) If not, can your product / service be positioned as a lifeboat so that others can overcome the downturn?
Leadership – Plan, communicate and act with compassion
Review your sales revenue goals, product timelines and create a new business model and operating plan – and communicate them clearly to your investors, then to your employees. Keep people focused on an achievable plan that they clearly understand. From the point of view of having experienced the last three accidents, I found that the biggest mistake made by the CEO was not to drastically cut spending quickly enough. They eliminated layoffs and clippings that cling to favored projects with a magical thought that, somehow, it was just something that was going to happen. You must act now.
If you are in a large company considering layoffs, the first option should be to cut the salaries of the highest paid executives / employees to try to keep the people least able to afford it. (The good things will come to CEOs who first try to save everyone on the ship before jumping into the lifeboat.) If / when people are to be fired, do it with compassion. Offer additional compensation. If, in the worst case, you find that you are running out of money, do not reduce it to zero. Do the right thing and have enough money to provide everyone with at least two weeks or more of salary.
Access to capital is one of the key elements of survival. As a startup or small business, you need to understand that your investors are also wondering how this pandemic will affect their business model. The hard and cold truth is that in an accident, the VCs run their own "What am I saving in the lifeboat?" exercise. They sort their transactions – worrying first about the liquidity of their advanced phase transactions which have the highest valuations. These startups generally have very high burn rates and their funding could fall from a cliff. You and the survival of your startup may no longer be their priority and your interests will no longer be aligned. (VCs who tell you otherwise are either naïve, lying between their teeth, or are not serving the interests of their investors.) In each major downturn, inflated valuations disappear and the few VCs who still write new checks find it c & Is a buyer's market. (Hence the expression "capitalist vultures".)
Some investors only lived in a booming market when valuations only increased when there was plenty of investment capital. But gray-haired investors can remember the nuclear winter after the last recessions of 2000 and 2008, and can offer historic models of crashes and recovery to CEOs who run start-up startups – some who don't. were not born when the 1987 crash struck, were 10. years old in the 2000 crash and 18 years in the last 2008 crash. Keep in mind that today’s circumstances are different . It is not a bear market. This is a conscious shutdown of the bulk of our economy, exchanging jobs to save hundreds of thousands of lives, causing a bear market and a likely recession.
Data from the last major crash of 2008 showed that seed rounds recovered early, but funding at a later stage cratered and took years to recover. (See figure below showing quarterly venture capital investments before and after this crash – part of this post by Tomasz Tunguz.)
This time, the health of the venture capital firm may depend on what hedge funds, investment banks, private equity firms, sovereign wealth funds and large corporations do. secondary market. If they withdraw, there will be a liquidity crisis for startups at a later stage (series B, C…). For all short-term startups, the conditions and valuations of the transaction will worsen, and there will be fewer investors watching your transaction.
As the CEO of a startup, you need to know if your board of directors is going to yell at you for not drastically reducing the burn rate and coming up with a new business model or, will they yell at you to stop to be distracted and stay the course?
And if the latter, I would like to know what skin in the game they have, if they are wrong. It is easy enough for VCs to tell you that they will be right behind you when you need a next round, until they are not. Unless your investors associate their "full speed" orders with a deposit at your bank, now is not the time to get caught up in an unrecoverable burn rate.
Prepare for a long, cold winter.
But remember, no winter lasts forever and smart founders and VCs will plant the seeds of the next generation of startups.
- It is a conscious shutdown of our economy, exchanging jobs to save hundreds of thousands of lives
- This will likely cause a recession
- The Covid-19 virus will change the way we shop, travel and work for at least a year and probably three
- It is inconceivable that you can have the same business model today as it did 30 days ago
- Set up rescue plans for three-month, one-year and three-year slowdowns
- Recognize that your investors will act in their best interests, which may no longer be yours
- Take action now
- But act with compassion
Filed Under: Venture Capital |