The Coronavirus pandemic has hit all companies and businesses worldwide, and while some giant companies like Amazon are thriving at these times, small businesses and startups are experiencing some difficulties. If you are an owner of a small company or startup, you surely must have a Coronavirus survival plan for your business.
In this article we will share some thoughts regarding how you can manage your company in a pandemic.
Social isolation and the announced national emergency had an immediate impact on the cluster industry sectors; conferences, trade shows, air carriers / cruise ships and other modes of travel, the hospitality industry, sports competitions, theatre and film, restaurants and schools. Large corporations are sending staff to work at home. Large supermarket chains close down their outlets.
Although the “gig-economy” effect on small companies and workers has not made the news, it would be worse for them. They have fewer capital reserves and less error margin to handle unexpected recessions. The ripple and feedback impact of all these closures would have a big effect on the economy, because any sector that is affected is laying off workers, and those laid off are not buying any services and products.
It is no more life as usual for the general economy. In reality, the pandemic shutdown of the economy has never occurred before. Millions of employment might be lost over the next few weeks, as whole economies are destroyed, something perhaps not seen since the Great Depression of 1929-39. I hope I am wrong, but the social and financial impact of this epidemic is expected to be significant and will alter the way we shop, work and travel for coming years.
If you own a small company or a startup, your main concern (after your family) is make sure your staff and clients are safe. Now the next question is, ‘What is going to happen to my company?” Throughout this article we will help you build your Coronavirus Survival Plan.
The list of questions that any start-up or small company Chairman needs to ask now are:
- What’s my company’s Burn Rate and the Runway?
- What do you think your latest business plan looks like?
- Is that a three-month, one-year, or three-year issue?
- What are my stakeholders going to do?
Burn Rate and Runway
To answer your first question, make note of your present total burn rate, i.e. how much cash you devote each month. How many are fixed costs (those you can’t adjust, i.e. rent?) And how much are overhead cost (salaries, agents, fees, transportation, AWS / Azure fees, supplies, etc.)?
First, look at your real monthly revenue – not your estimate, but your actual monthly revenue. If you are an early-stage business, that number might be zero.
Subtract your total monthly burn rate from your monthly profits to have your net burn rate. If you make more money than you spend, you have a good cash flow. When you are a start-up and have less sales than your expenses, the number is negative and reflects the sum of cash the business loses (‘burns’) every month. Take a close look at your bank account now. How many months the business will withstand burning the amount of cash each month. That’s your own runway – the length of time your business has to run out of cash. This analysis is based on a normal market…
The World’s Upside Down
However, this is no longer a normal industry.
- All the consumer expectations, sales cycle and, most significantly, income, burn rate and runway are no longer valid.
- If you’re a startup, you’ve already measured your runway to last before you collect the next round of funding. Knowing the next round was going to take place. However that may no longer be the case.
What does my business plan look like right now?
Because the today’s world is not quite the same as it was a couple of months ago, and is expected to get worse in a month from now on, if your business plan today looks the same as it did at the start of the month, you’re in denial – and probably out of business. That is why we are going to help you create your own Coronavirus Survival Plan.
It’s the essence of startup CEOs to be positive, but you need to quickly check your client and sales assumptions. If you’re selling to other companies (B2B market) your customers’ profits have dropped? Are your clients going to close over the next few weeks? Is it laying off staff? If it does, whatever your prediction of revenue and sales cycle calculations are no longer accurate. When you’re selling directly to customers (the B2C market), have you been in a multi-sided market (customers are using the product, but others are paying you for their eyeballs / data?) Are those theories about payers already right? How would you know that?
What’s the latest financial measure? Receivables, get on top of them. A few days of cash left?
Now you’ll have to find out your real burn rate and runway in this different situation.
Is that a three-month, one-year, or three-year issue?
Next, you have to breathe deeply and ask yourself, is this a three-month problem, a one-year problem, or a three-year issue? Will company closings be a temporary setback in the economy, or will they push the US and Europe into a long crisis?
If it’s only three months (looking very impossible with each day) perhaps an immediate moratorium on variable expenditure (hire, advertising, travel, etc.) is in order. However if the consequences are going to resound longer in the community, you need to begin redesigning your company. You’re going to need a lifeboat plan. That’s a flashy term to figure out what negligible stuff you need to keep your business intact and what to consider leaving behind.
Whatever your product / market fit was last month, it is no longer correct and needs addressing to match the current normal. Does this open up new value ideas, or does it ruin others? Is it altering the product?
You and the sustainability of your company will no more be you VC’s focus, and your priorities will no longer be matched
And if it’s a problem for three years? What changes you should make to you Coronavirus Survival Plan? First of all you have to throw away everything that’s not important for survival, but you likely need to have a new business model. In the immediate future, investigate how a portion of your business model can be driven by new social isolation laws. Can your product be sold, distributed or made online? Does it have any advantages if it’s provided in that way? If not, can your product / service be placed as a lifeboat for someone else to overcome the recession?
Leadership – Plan, Interact and Work with Compassion
Modify your total revenue targets, product launch schedules, and establish a new business strategy and business model – and explain them to your stakeholders and your staff. Keep the people concentrated on a workable plan that they obviously understand. From the viewpoint of having lived in the last three crashes, I’ve noticed that the biggest error made by a CEO was not making punitive cuts to expenditures fast enough. They dripped layoffs and cuts hanging on to favoured projects, hoping that this was just something that should happen. You have to act right now.
If you are in a big organisation planning layoffs, the first choice would be to reduce the wages of the higher paid executives / staff in order to seek to retain those who are least able to afford them, employed. (Good stuff comes to the CEOs who first strive to save everybody on the ship before they get in the lifeboat.) If or when employees need to be laid off, do so with empathy. Offer extra compensation. If you see that you’re running out of money in the worst case, don’t push it down to zero in any conditions. Do the correct thing and have enough cash available to give everybody at least two weeks or more of their salary.
Access to capital is among the key aspects of Coronavirus Survival Plan. As a start-up or a small company, you should know that your stakeholders are also wondering how this pandemic could impact their business strategy. The cold hard reality is that VCs run their own “What do I bring in the lifeboat?” exercise. They arrange their contracts – the first to think about the value of their late-stage deals with the highest pricing. Usually, these companies have very high burn rates, and the financing for those startups will fall off the edge.
You and the sustainability of your company will no more be their focus, and your priorities will no longer be matched. (VC’s who tell you differently are either arrogant, lying through their teeth, or not representing the interests of their investors.) With any big recession, inflated market values vanish, and the few VC’s still writing new checks realise that it’s a buyer’s market. (This is the term “Vulture Capitalists”).
Some shareholders have only existed in a thriving economy when market values have only risen and investment capital has been available. But grey-haired investors can recall nuclear winter after the last financial crises of 2000 and 2008 and can deliver some recent trends of crashes and recovery to CEOs operating early-stage startups – those who were not born when the 1987 crash occurred, were 10 years old when the 2000 crisis happened, and 18 years old when the 2008 crash struck. Bear in mind that the conditions of today are unique. It’s not a bear stock market. This is a deliberate shutdown of much of our economy, a reduction in employment to save hundreds of thousands of lives, a market crash, and a possible recession.
Information from the last big crash in 2008 saw seed rounds returning early, but later stage funding collapsed and took years to recover. (See chart below showing quarterly VC investments during this crash – part of this Tomasz Tunguz post.)
This time around, the health of companies may rely on what hedge funds, financial firms, private equity firms, sovereign wealth funds, and broad secondary market entities do. If they step back, there will be a funding gap for later start-ups (Series B, C …). For all companies in the short term, the terms of the contract and appraisals will become worse, and there will be less investors interested at the offer.
As a startup CEO, you should know if the board is trying to shout at you for not dramatically reducing the burn rate and coming up with a new business plan, or are they going to shout at you to stop getting frustrated and maintain the course?
And if this is the case, I’d like to know what kind of skin they have in the game, if they’re incorrect. It’s pretty straightforward for VC to tell you that they’re going to be with you if you need a next round, until they aren’t. If your stakeholders suit their orders for “full steam ahead” with an investment in your accounts, now may not be the time for a burn rate that is unsalvageable.
Get ready for a long cold winter
But note that no winter will last permanently, and smart entrepreneurs and VCs will sow seeds for the next generation of businesses.
Learn your Lessons
We discussed different things in this article and now you can create a Coronavirus Survival Plan for your business or startup. Just remember:
- This is a deliberate closure of our economy, a swap in jobs to save millions of lives.
- This is likely to spark a recession.
- The Covid-19 virus would affect how we shop, ride and work for at least a year and potentially three years.
- It’s unimaginable that you will have the same business strategy today as you had 30 days ago.
- Set up lifeboat strategies for three-month, one-year and three-year declines.
- Acknowledge that your investors must behave in their benefit, which might no longer be yours.
- Take action right now.
- But behave with compassion.