VCs explain how founders can help their business emerge stronger during coronavirus crisis
A group of VCs have come out with certain guidelines, which are useful for startup founders to internally restructure their business to survive the impact of coronavirus
Coronavirus or Covid-19 has wreaked havoc across the world with life coming literally to a standstill in many parts of the globe, having a deep social and economic impact on societies.
In such an environment, startups are also vulnerable as they stare at an uncertain future.
To help startups navigate through this crisis, leading venture capitalists (VCs) such as Accel, Bessemer Venture Partners, Chiratae Ventures, Kalaari Capital, Lightspeed, Matrix Partners India, Nexus Venture Partners, Omidyar Network India, SAIF Partners, and Sequoia Capital India have come up with a set of guidelines to address the various business challenges under the topic ‘Best practices for founders in the wake of Covid-19’.
“It (Covid-19) is also a period of very high uncertainty, both in terms of the short-term impact on business and the long-term impact on the macro environment in which you are building those businesses. Founders will inevitably be faced with difficult decisions, tactically on execution for the next 21-30 days, and strategically on how to plan for the next 12-18 months,” says the guideline.
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The first and foremost challenge startup founders need to address is the business aspect. YourStory lists some of the points put forth by the VCs.
Scenario planning
The macro situation is constantly evolving, and adaptability of all plans is the key. This will require modelling for different macro scenarios.
“For most companies, the first priority should be employee safety, followed by business continuity and liquidity, and runway a key third.”
This will be a stress test for all assumptions where normal behaviour is not accepted - be it receivables getting delayed, customers asking for price cuts, and contracts not closing.
Once the modelling is done regarding the scenarios, the next step would be to plan and then execute.
Company restructuring
In these very uncertain times, the need of the hour is to ensure the company maximises cash runway. One of the steps for that is cost management.
Marketing: According to the VCs, it would be prudent to stop all marketing expenses till business comes back to ‘close to normal’. By this time, one can increase their marketing slowly by keeping the customer acquisition cost low.
Rentals: Founders should use the opportunity to reduce leases that might have been non/low performing.
G&A (including technology costs): VCs say this is an important head item when it comes to cost savings, as most inefficiencies creep into general and administrative expenses during the growth phase and bull markets.
Working Capital: Cash is king, and this is the number one advice from the VCs to the founders, and have asked them to look at various ways one can reduce costs to increase the savings. This would also mean a halt to all capital investments. All these lead to a better runway for the startup.
Overall: This would require founders to proactively involve functional leaders to ideate and execute these items where there is clear communication.
Though one is not clear when the recovery would take place, VCs advice founders to prepare for a U-shaped recovery where the drop in business could be sharp. They say founders need to ensure runway through 2021 or at least till June 2021.
Business Continuity Planning
A Business Continuity Plan (BCP) outlines a range of scenarios that could negatively impact the business, and the steps that will be needed to minimise the damage and expedite recovery.
Preparedness: Founders need to define escalation level and responses that need to be tailored for each level. This would need creation of a Tiger Team, which is cross functional, and can swiftly take decisions when needed. It would also mean that startups are equipped to work from home and create backups.
Protection: This would require focus on employee health and safety, which includes travel advisory, sanitisation protocol, and quarantine guidelines if need arose. Besides, there needs equal importance on data access and security.
Response: This would mean managing mission critical functions, handling customers, vendors, HR and communication and morale within the organisation.
Recovery: The advice from VCs to the founder is to create a second Tiger Team that will identify and execute leapfrogging opportunities. Even the office reopening plans needs to be gradual to minimise the risk of contagion.
Assessing and managing systemic risks
Founders need to create a framework that allows the company to be proactive rather than reactive while assessing the macroeconomics trends in the market.
Exchange rates risk: If the startup is import dependent, then forex risk could be crucial.
Disruptions in supply chain: This would require startups not to rely on any one single service provider, whether it is sourcing goods from China or logistics provider for example.
Over-dependency on Capital Sources: Startups should not over-leverage by taking too much debt, plan working capital requirements, and over-dependency on a single investor.
These are some of the general guidelines provide by the VCs for the startup founders to navigate through this global pandemic.
(Edited by Megha Reddy)