Dear startup CEOs: It’s time to shift your mindset.
Last week might have been about growth and funky new initiatives. It could have been about hiring employees and closing that new financing round and launching that new product. Last week was about shiny things. Growth was your religion, and your North Star was closing deals and booking revenues. Amen.
But we woke up in a different world, a world where part of the population is shielded from normal social life (or will be soon) due to the spread of coronavirus. This new world calls for new rules. Your new religion is now survival, and your new God is called liquidity.
I’m willing to bet none of you had a “global pandemic” section in your 2020 financial planning sheet.
I spoke to a VC today who summarized it nicely: “In 12 months it will be easy for you to explain why your startup didn’t grow in the last six months. But it will be very hard to explain why your startup is dead.”
Whatever your priorities were in the last couple of months, your new top priority needs to be cash. But there are more things to consider in times like these. Managing a crisis can be hard, especially if it’s your first and has the magnitude of the current one. So consider these points as a guideline to give you a bit of a direction:1. Dump your 2020 strategy and business plan and take out a blank page
Most 2020 plans were created based on a more or less normal worldview. I’m willing to bet none of you had a “global pandemic” section in your 2020 financial planning sheet. So you might as well clear out the entire document and start on a blank page. New realities call for new plans.
There is not enough information and clarity about the whole situation to create a robust new plan just yet. Steering your ship in times of crisis will require a lot of course corrections and smaller maneuvers. So make the planning part of your daily war room and adjust the forecast as you gather new information. Your new object of attention in the new planning process will become liquidity.2. Create a safe work environment by working from home
By now, this might be a no-brainer, but it’s still worth repeating. Most startup CEOs I know have sent their employees home to work remotely, and those who haven’t should. With a lot of countries implementing various social-distancing policies, remote work seems like the safest and most reasonable thing to do. Of course, this means that productivity is going to drop temporarily. But let’s be realistic: What would productivity look like if people sat around scared in your office fearing to become infected? Or if they just called in sick and didn’t show up at all?
While implementing a work-from-home policy for your company, don’t feel the need to reinvent the wheel.
While implementing a work-from-home policy for your company, don’t feel the need to reinvent the wheel. Other organizations have done this before and kindly shared their experiences. Research best practices first, do a test run, and then implement your WFH policy. The quicker the better.3. Err on the side of overcommunication
My friend Steli Efti, the CEO of Close, has been working remotely along with his staff of more than 50 people over the last five years. His best advice: overcommunicate. With an ongoing crisis that naturally requires more communication and a possible transition to remote work, you have all the more reason to communicate a lot.
In my experience, turbulent times call for different levels of communication. There is town hall-style communication where you as the CEO address the entire staff with updates and then answer questions. On top of doing that weekly during the crisis, take the time to address individual team members directly as needed.
You will spend an enormous amount of time talking to people and addressing their insecurities over the next couple of weeks and months. Don’t be afraid to repeat yourself, to be proactive in seeking employees out, and to overcommunicate, overcommunicate, overcommunicate.4. Establish a daily Covid-19 war room
The concept of “war rooms” obviously originated from military procedures and means putting together a physical or virtual space to gather all mission-critical information and to bring relevant people together to make quick decisions.
Establish a daily war room to bring relevant people together to make quick decisions regarding coronavirus and its impact on your startup and your staff. You should assemble your co-founders and management team regularly to review new information and make decisions. Use those meetings to carefully observe your incoming orders, revenues, and, most importantly, to track your cash flow and cash on hand.
The more substantial the impact of the crisis, the more often the meetings will happen, and the longer they will take place. In the beginning, start holding them daily and then reduce intervals when needed.5. Stabilize your business operations and supply chain
Use the first war room meetings to answer these questions: How are your business operations and supply chain impacted by the crisis? If you’re selling physical products, could your supply flow be restricted or cut off? Is the distribution of your products affected? A lot of warehouses will have a shortage of workers and lower capacity than in regular times.
If you don’t deal with physical products, take note of the critical business functions that could suffer from people getting sick, staying home, or being temporarily overwhelmed by a transition to remote work. In which parts of your business are you reliant on third-party suppliers, and how can you make sure they will still supply you?
Concerning new projects and initiatives: I would (at least for the moment) pause shipping new features or new products and pause opening new locations and generally question everything “new” until the situation gets clearer and your core operations run sustainably and are stable.6. Inform customers about business continuity
As much as you rely on your suppliers, your customers depend on you. So take the time and communicate thoroughly how you will handle your service and if customers should expect any restrictions. Remember to overcommunicate.7. Realize that your revenue can (and probably will) get out of your control
Your sales have likely already been affected by the new situation. A small number of businesses’ revenues will soar (think online education, video conferencing, e-commerce for household goods, etc.), but most will at least temporarily stagnate or decline. In the B2B industry, signing up new clients through a sales organization might turn out to be challenging because of the lack of physical interactions as well as a general expenditure freeze.
The new reality is: You can’t control your top line, so better prepare to work on cash collection and cost structure.
One VC told me about a portfolio company that employs 35 sales reps and usually closes on 20 new clients per month. The number of clients closed for the last two weeks was exactly zero. And from an acquaintance who runs an e-commerce fulfillment center, I heard that orders throughout all industries have decreased by 30% to 40% since last week.
The psychological burden of quarantine lockdowns and uncertainty will undoubtedly impact consumer behavior in the short-term. As for mid-term and long-term planning: Of course, specific industries like e-commerce could benefit from the new situation, but it’s just too early to tell. The new reality is you can’t control your top line, so better prepare to work on cash collection and cost structure.8. Calculate your runway in multiple scenarios
In every crisis, cash is king. The opposite is also true: The company left without cash on hand can quickly become a fool. So look at your cash position today and calculate your runway based on lower revenue scenarios.
In my experience, the most pragmatic thing is to create three scenarios: 1) best case; 2) average case; and 3) worst case. In an ordinary world, “best case” would mean growing revenues (the 2020 plan you just dumped). In today’s world, the “best case” should probably mean steady revenues. The average and worst case would be some degree of revenue declines, for example, -20% and -40%. Sadly, there are already companies where their respective declines approach -100% (think along the lines of a startup in the live events industry).
The actual numbers depend on the early signs you gather from your sales and how heavily your company depends on new customers vs. existing ones. Monitor sales and marketing carefully to find out which scenario is most realistic for you. That’s what your war room meetings will be for.
The shorter your runway, the more drastically you should execute the following actions. If you have more than 12 months of runway, even in the average-case or worst-case scenario, you have enough time to observe and could allow yourself to course-correct first in a couple of months. If you are between six and 12 months, you should be very cautious and have a contingency plan ready to execute. If your runway comes out under six months in the average-case scenario (which will be the case for a lot of startups), the time to act is now.
At this point, you might be having an “oh shit” moment. It’s the moment when you realize you’re much shorter on cash and runway than you initially thought. Things might look much bleaker than at first sight. Welcome to the part that sucks most about entrepreneurship. Your job isn’t about figuring out the best option anymore. Your job is now finding the option that is the least bad. And this option will probably still hurt, but less than all the other options you have at your disposal.
With the new reality around us comes a new goal: preserving cash. That’s an entirely different modus operandi than executing a growth strategy and calls for different measures.9. Don’t count on VC funding
Following the financial crisis in 2008/2009, venture capital investments fell sharply, by over 50% from their peak in 2008. It took over two years before funding got back to the old level at the beginning of 2011. Think about it from the VC perspective: Hoarding cash in times of uncertainty might be the dominant strategy. Nobody wants to invest in a “falling knife,” even if the macro environment causes it. So don’t count on your local rocket-fuel dealer to equip you with enough liquidity to steer through the crisis. This time you might be on your own.
If you’re currently raising funds, try to get clarity as soon as possible. Openly address your concerns with your potential partners and get a realistic picture of whether they can and will invest or not. At first glance, most VCs state that they’re still investing the same, no matter what the situation is with coronavirus or a potential recession. History and statistics show us that most of them effectively won’t.10. Pull in cash from all sources
Focus on the most common action steps to preserve and pull in liquidity in times of crisis. It won’t be easy: A lot of other companies are in the same situation as you are, so acting quickly and decisively is paramount.
One critical thing to keep in mind while optimizing your cash flow: Every dollar you pull in or don’t pay out has to come from (or be withheld from) somewhere else. So please always think about who you’re dealing with. If you owe a couple thousand dollars to a big corporate enterprise, paying later probably doesn’t make much of a difference to them. But if you owe it to a freelance subcontractor whose bookings might have already imploded and who needs to support a family, that’s an entirely different story. I’ve seen companies that actually fasten their payout cycles in those kinds of situations or even lengthen their collection cycles for more affected industries like restaurants. So please always keep in mind who you’re impacting on the other side of the transaction.
With that being said, let’s go back to your options for optimizing your cash flow:
- Credit. If you can draw on any committed line of credit, consider doing so now. Whether it’s from your house bank, your investors, or something like a PayPal business loan, it’s better to activate it now before the systems get overwhelmed, or programs are being pulled.
- Accounts receivables. Your customers might start to become low on cash in the future, so better talk to them today about outstanding invoices. I’ve heard from multiple sources that payments from customers start to become late due to the simple fact that accounting departments are understaffed. Best practice in those kinds of situations is to calmly and pleasantly call customers one by one, figure things out, and collect as much cash as possible early on. On top of the regular collection, consider offering discounts or better terms for customer prepayments.
- Accounts payables. Wherever possible, try to renegotiate longer payment terms and defer payments. Implement payment plans over multiple installments, if possible. Go through your suppliers and demand concessions now. Of course, they won’t like it, but they probably expect such calls already.
- Taxes. Delay tax payments as long as possible. Some governments have already implemented looser rules on tax collection. Utilize those to full capacity and maybe even accept penalties for late payments in exchange for not paying today.
- Decrease inventory. You do that either by ordering less new stock or selling what you have, even at discount prices. It can be an excellent opportunity to clean out your warehouse and generate cash, even if it means sacrificing margins.
This is never fun to do, but better to be prepared now than to feel sorry later. Look at the cost breakdown of your profit and loss statement, start with the most significant items (usually payroll or marketing), and work your way down. Ask yourself where your biggest levers lie to preserve cash and cut costs. For each of your scenarios, you should plan on which costs to cut in case revenues fall below the respective threshold of the scenario. Here are the most common things to look at:
- Rent. Can you lease less space during the crisis?
- External suppliers. Which projects can you reduce or postpone?
- Working hours. It’s always better to reduce working hours and keep people on staff instead of just letting them go. It usually works pretty well, and people understand it in crises if it’s well communicated (meaning overcommunicated).
- Headcount. How can you achieve the same with fewer people? It shouldn’t be your first choice, but be prepared to know what scenarios and revenue levels would force you to execute layoffs.
- Founder salaries. Any flexibility here to support the business?
- Product and R&D. What projects or product launches can you postpone to save cash?
What I currently see other startup CEOs doing at the moment is freezing hiring and salary increases. A lot of companies have cut external suppliers and freelancers for noncritical projects. Some companies have started to reduce working hours and pay accordingly. Some CEOs are preparing or executing layoffs.12. Watch your marketing spend and ROI
With conversion rates dropping and sales meetings not happening, your customer-acquisition costs might soar through the roof over the next days and weeks. Also, higher customer churn and shortfall on payments can lead to lower customer lifetime values. Watch both metrics meticulously in your war room meetings. Adjust your spending according to your new reality. In some cases, increasing marketing budgets and generating more revenues might work out. More commonly, however, saving the budget will produce a longer runway.
Opportunities will still be there in a couple of months. There is no need to rush unless your core business is doomed. If this is not the case, focus all your energy on stabilizing and preserving what you have built so far.
Keep a close eye on CAC and CLV and make daily adjustments to your spending. If you’re currently low on cash (less than 12 months of runway in your average case), it might make sense to raise the bar on “required ROI” from each ad or sales campaign to make your marketing more profitable in the short term.13. Check out government aid programs and talk to other entrepreneurs
Depending on your local administration, there might already be measures in place to stabilize the economy. A variety of actions I’ve come across in the past couple of days include 1) deferment of tax payments; 2) a reduction in working hours of employees and a partial refund of salaries by the government; 3) “rescue funds” for specific industries (like hospitality) that provide uncomplicated loans; or 4) a loosening of bankruptcy laws and reduction of personal liabilities.
The easiest way to learn about those kinds of programs is to talk to other entrepreneurs. In the past couple of days, many WhatsApp groups have formed around sharing best practices and figuring out access to those aid programs. Join the conversation, ask others for help, and share what you’ve learned yourself.14. Inform your investors about the situation
With all the daily challenges, this one might slip your mind, but you should communicate your plans to your investors. Include your runway and a general overview of how the coronavirus situation will most likely impact your business. If it’s really bad and you’re going to need new money fast, let them know early. If you have bad news, better deliver it quickly and in a thought-out manner.15. Think about opportunities later
Every crisis gives birth to a thousand opportunities. The same will undoubtedly be true for this one. But before you pivot your enterprise SaaS company into producing organic face masks, hold on for a moment. Opportunities will still be there in a couple of months. There is no need to rush unless your core business is doomed. If this is not the case, focus all your energy on stabilizing and preserving what you have built so far and get yourself into a stable situation to assess new opportunities down the road.16. Tone down the optimism a touch
There is a German saying: “Vorsicht ist die mutter der porzellankiste.” Literally, it translates to: “Carefulness is the mother of the porcelain case,” which basically means “Better safe than sorry.”
Your startup in the middle of a crisis is like a box full of fragile porcelain. Prepare, act calmly and cautiously (but decisively), and handle it with care. Avoid inconsiderate hectic rushes and make sure you’re holding it tight for when disaster hits.
We’re all hoping the current situation will not be as harmful as it could be to people’s health and nations’ economies, but we also know that as entrepreneurs, we tend to be a tiny bit overly optimistic in times. (How could we have otherwise started our businesses in the first place?) Consider temporarily dialing that optimism down just a little bit for the next couple of weeks. Think about the mother of the porcelain box, prepare yourself, your team, and your company, and remember: Better safe than sorry.