Your job is no longer to find the strategy with the best odds - it's to find the one with the least risk...
Dear startup CEO, it's time to change your mindset.
Last week may have been all about growth and new, unusual initiatives. It was about hiring employees, closing the new round of funding, and launching a new product. Last week was about beautiful things. Growth was your religion, and your north star was closing deals and booking revenue. Amen.
But we've woken up in a different world, a world where part of the population is (or soon will be) insulated from normal social life by the spread of the coronavirus. This new world demands new rules. Your new religion is now called survival, and your new god is called liquidity.
I would bet that none of you had a "Global Pandemic" section in your 2020 financial plan.
I was talking to a VC today who summed it up nicely, "In 12 months, it will be easy for you to explain why your startup hasn't grown in the last six months. But it will be very hard to explain why your startup is dead."
Whatever your priorities have been over the last few months, your new top priority needs to be liquidity. But in times like these, there are more things to think about. Crisis management can be difficult, especially if it's your first crisis and it's on the scale of the current one. The following points should give you some guidance, at least give you some direction:
1. throw away your 2020 strategy and business plan and start on a blank page.
Most of the 2020 plans were made based on a more or less normal world view. None of you have a "global pandemic" section in your financial planning sheet. So you might as well throw out the entire document and start with a blank page. New circumstances require new plans.
The only problem is, there's not enough information and clarity about the whole situation yet to make a robust new plan. Steering your ship in times of crisis will require a lot of course corrections and minor maneuvers. So make planning a part of your daily crisis meeting and adjust the forecast as you come to new information. Your new focus in the planning process will be liquidity.
2. create a safe working environment - home office
By now, this may be a no-brainer, but I'll repeat it anyway. Most startup CEOs I know have sent their employees home to work in a home office. And the CEOs who haven't done this yet should. Given that many countries are implementing various policies aimed at social distance, it seems like the safest and most sensible thing to do in the current situation. Of course, this means that productivity will drop temporarily. But let's be realistic: what would productivity look like if people were sitting in their offices afraid of catching a disease? Or if employees just called in sick and didn't show up at all?
You don't need to reinvent the wheel to implement a home office policy for your business.
3. over-communicate, especially with home office.
My friend Steli Efti, CEO at Close, has worked remotely with over 50 people in the last five years. His number one piece of advice: over-communicate! With an ongoing crisis, which in itself requires more communication, and the transition to remote work, you have all the more reason to communicate a lot.
In my experience, turbulent times require different levels of communication. There's what's called "hall-style" communication, where you, as CEO, need to provide updates and answer questions to the entire staff. Such a meeting can be held once a week to begin with. In addition, take the time to address individual team members directly.
You'll spend an enormous amount of time over the next few weeks and months talking to people and listening to their fears. Don't be afraid to repeat yourself, proactively address employees, and over-communicate, over-communicate, over-communicate at all.
4. set up a daily COVID 19 war room
The concept of "war rooms" apparently originated in the military, and involves setting up a single physical (or virtual) room to gather all mission-critical information and bring relevant people together to make quick decisions.
Set up your own "war room" to bring all relevant people together to see the impact of the coronavirus on your startup and employees, and make decisions quickly. You need to bring your co-founders and management team together regularly to review new information and make decisions. Use these meetings to carefully monitor your incoming orders and revenue, and most importantly, to track your cash flow and cash on hand.
The greater the impact of the crisis, the more often these meetings will occur and the longer they will last. Have the meetings daily in the beginning and then reduce them if necessary.
5. stabilize your business operations and supply chain
Use the initial meetings in the "War Room" to answer the following questions: How are your business operations and supply chain affected by the crisis? Do you sell physical products whose flow is or could be restricted? Is the distribution of your products affected? Many warehouses will have a shortage of labor and lower capacity than in regular times.
If you don't have physical products: What critical business functions might suffer from people getting sick, staying home, or being temporarily overwhelmed by the transition to home office? What parts of your business do you depend on third-party suppliers for, and how can you ensure they continue to supply you?
Regarding new initiatives: I would pause (at least for now) development of new projects, sales of new products, and opening of new locations, and generally question anything "new" until the situation becomes clearer and your core business is sustainable and stable.
6. inform customers about your situation
As much as you rely on your suppliers, your customers rely on you. So take the time to thoroughly communicate how you will handle your processes and whether customers will face any restrictions. Remember, it's better to over-communicate than under-communicate!
7. realize that your revenue can (and probably will) plummet.
Your sales are probably already affected by the new situation. Revenue for a small number of businesses will jump (think online education, video conferencing, home goods e-commerce, etc.), but most will stagnate or decline, at least temporarily. In B2B, attracting new customers may prove particularly difficult due to the lack of physical interactions as well as a general spending freeze.
The new reality is: you can't control your revenue anymore, so hold on to your liquidity and work on your cost structure.
A VC told me about a portfolio company that employs 35 sales people and usually gets 20 new customers a month. The number for the last two weeks has been? exactly zero. The same can be true for B2C companies: I heard from an acquaintance who runs an e-commerce fulfillment center that orders across all industries are down 30-40% since last week.
The psychological toll of quarantine lockdowns and uncertainty will undoubtedly impact consumer behavior in the short term. As for medium- and long-term planning: of course, certain industries like e-commerce may benefit from the new situation, but it's just too early to tell. The new reality is: you can't control your sales, so better prepare to work on your liquidity and cost structure. And do it now.
8. forecast using scenarios
In any crisis, "cash is king." The opposite is also true: If you don't have cash, you can quickly become a fool. Look at your cash on hand today and estimate your survival time based on various scenarios.
In my experience, it is most pragmatic to create three scenarios:
- best case,
- average case,
- and worst case.
In an ordinary world, the "best case" would mean growing revenues (the 2020 plan you just dropped). In today's world, the "best case" should probably mean stable revenues. The average and worst case would be some level of revenue loss, say -20% and -40%. Unfortunately, there are already businesses where the respective declines approach -100% (think event or hospitality industry).
The actual numbers depend a lot on the early indications you draw from your sales, and how much your business depends on new customers (versus existing ones). Watch sales and marketing carefully to figure out which scenario is most realistic for you. This is what your "war room meetings" will be for.
The shorter your survival period, the more drastic the following actions you should take. If you can survive more than 12 months, even in the average or extreme case, you have enough time to observe the situation and could allow yourself to correct course only in a few months. If you are between 6 and 12 months, you should be very careful and have a contingency plan ready. If your survival period is less than six months in the average scenario (which will be the case for many startups), now is the time to act.
At this point, you may have an "Oh Sh****" moment. It's the moment you realize you have less money and your survival period is shorter than you initially thought. Things may look a lot bleaker than at first glance. Welcome to the part that sucks the most about entrepreneurship. Your job is no longer about figuring out the best option. Your job is now to find the option that is the least bad. And that option will probably still hurt, but less than any of the other options available.
With the new reality around us, a new goal is emerging: cash conservation. This requires a different way of doing things than implementing a growth strategy and builds on other measures.
9. don't count on VC funding
Venture capital investment fell sharply after the 2008/2009 financial crisis, down more than 50% from its 2008 peak:
It took over two years for funding to return to old levels in early 2011. Look at it from a VC perspective: hoarding cash in times of uncertainty may be the dominant strategy. No one wants to invest in a "falling knife" even if the macroeconomic environment is causing it. So don't rely on your local rocket fuel dealer to provide you with enough liquidity to navigate through the crisis. You're probably on your own this time.
If you're currently raising funds, try to get clarity as soon as possible. Address your concerns openly and get a realistic picture of whether or not your partners can and will invest. At first glance, most VCs state that they will invest no matter what the weather is like. However, history and statistics show us that most of them actually do not invest.
10. get liquidity
Focus on the most common action steps to obtain and attract liquidity in times of crisis. This won't be easy: many other businesses are in the same situation as you, so quick and decisive action is paramount.
One important thing to keep in mind when optimizing your cash flow: Every euro you retain or don't pay out comes from somewhere. So please always remember who you are dealing with. If you owe a few thousand euros to a big company, it probably won't make much difference to them if you pay later or not. But if you owe it to a freelance subcontractor whose income may have already imploded and who has a family to support, that's a whole different story. I've seen companies speed up their payout cycles in these situations, or even extend their collection cycles for harder-hit industries like restaurants. So please always remember who you are impacting on the other side of the transaction.
With that in mind, let's come back to ways to optimize your cash flow:
- Credit: If you can draw on a committed line of credit, you should consider it now. Whether it's from your local bank, your investors, or a PayPal business loan. It's better to activate it now before systems become overloaded or programs are withdrawn.
- Accounts receivable: Your customers may be short on cash in the future, so better talk to them about outstanding invoices today. I've heard from several sources that payments from clients start to get delayed because accounting departments are simply understaffed. The best practice in these situations is to calmly and kindly call clients individually, clarify matters, and collect as much cash as possible early. In addition to regular collections, consider offering discounts or better terms for customers' upfront payments.
- Accounts Payable: Try to renegotiate longer payment terms and defer payments. Implement payment plans over multiple installments, if possible. Go through your suppliers and ask for concessions now. Of course, they won't like it, but it's likely that they are already expecting such demands.
- Taxes: delay tax payments as long as possible. Some governments have already introduced looser rules for tax collection. Take advantage of these and perhaps even accept penalties for late payments.
- Reduce inventory: You can do this either by ordering less new stock or by selling your stock, even at discount prices. It can be an excellent opportunity to clear your stock and generate cash, even if it means losing margins.
11.Create a capital-efficient plan by cutting costs.
It's never fun to do this, but it's better to be prepared now than to regret it later. Look at the cost breakdown of your profit and loss statement, start with the most important items (usually payroll or marketing) and work your way down. Ask yourself where the biggest levers are to save money and reduce costs. For each of your scenarios, plan for what costs should be cut if revenue falls below that scenario's threshold.
- Rent: Can you rent less space during a crisis?
- Outside vendors: What projects can be deferred?
- Working hours: It's always better to reduce hours and keep employees than to just lay them off. Usually, with good communication, employees will show understanding (i.e. over-communicate).
- Number of employees: how can you do the same thing with fewer employees? It shouldn't be your first choice, but you should be knowledgeable about what scenarios and income levels lead to layoffs.
- Founder salary: is there flexibility here to support the business?
- What projects or product launches can you defer to save money?
What I'm currently seeing with other startup CEOs: Most companies have frozen hiring and raises. Many companies have cut outside vendors and freelancers for non-critical projects. Some companies have started reducing hours and salaries accordingly. Some CEOs are preparing or implementing layoffs.
12. question your marketing spend and ROI.
If conversion rates drop and sales calls don't happen, your customer acquisition costs could skyrocket in the coming days and weeks. In addition, higher customer churn and non-payment can lead to lower customer lifetime values. Pay close attention to both metrics in your war room meetings. Adjust your spending according to your new reality. In some cases, it may make perfect sense to increase marketing budgets and generate more revenue. More often, however, saving the budget will result in a longer survival time.
There will be opportunities in a few months. There's no need to rush unless your core business is doomed. If it's not, focus all your energy on stabilizing and maintaining what you've built so far.
Watch CAC and CLV carefully in your war room sessions and adjust your spending according to your new reality. About ROI: If you're currently low on cash (12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term. Watch CAC and CLV carefully in your war room sessions and adjust your spending according to your new reality. About ROI: If you're currently low on cash (12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term. 12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term. sessions and adjust your spending according to your new reality. About ROI: If you're currently low on cash (12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term. 12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term. Watch CAC and CLV carefully in your war room sessions and adjust your spending according to your new reality. About ROI: If you're currently low on cash (12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term. 12 months survival in your average case), it might make sense to raise the bar on "required return" in any ad or sales campaign to make your marketing more profitable in the short term.
Find out about government assistance programs and talk to other entrepreneurs.
Depending on your local government, there may already be measures in place to stabilize the economy. Among the various measures I've come across in the last few days are:
- Defer tax payments,
- reduction in employee hours, and partial government reimbursement of salaries,
- "bailout funds" for certain industries (e.g. hospitality) that provide easy loans,
- relaxing bankruptcy laws and reducing personal liabilities.
The easiest way to learn about these types of programs is to talk to other entrepreneurs. In the last few days, many WhatsApp groups have formed to share best practices and access these assistance programs. Join the conversation, ask others for help, and share what you learn yourself.
14. inform your investors about the situation
With all the day-to-day challenges, this one might slip your mind. Also, inform your investors. If things are really bad and you need new money fast, let them know early. If you have bad news, you better deliver it quickly and thoughtfully.
15. think about options later
Every crisis brings forth a thousand possibilities. The same will undoubtedly be true of this crisis. Before you swing your business into organic face mask production, wait a moment. In a few more months, opportunities will arise. There's no need to rush unless your core business is doomed. If it's not, focus all your energy on stabilizing and maintaining what you've built so far, and put yourself in a stable situation to evaluate new opportunities down the road.
16. reduce optimism
There's a German proverb that says, "An ounce of prevention is worth a pound of cure." Your start-up business in the middle of a crisis is like a box of fragile china. Prepare yourself, act calmly, cautiously but decisively, and proceed with caution. Avoid reckless rushing and make sure you keep your cool in the event of a disaster.
We all hope that the current situation isn't that damaging, but we also know that in many cases, as entrepreneurs, we tend to be a little too optimistic. Otherwise, how could we have started our businesses in the first place! Consider temporarily scaling back that optimism for the next few weeks. Remember the mother of china box, prepare yourself, your team and your business because "forewarned is forearmed".
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