SUMMARY
Investors in China are strongly advising their portfolio companies to extend their runway through 2021
Indian startups have been advised to plan for worst-case scenarios
Matrix Partners has advised entrepreneurs to plan for U-shaped recovery
The fear of unknown has crept into the world, and the startup ecosystem is no different. From investors to startups, everyone is talking about going into cash conservation mode and planning runway for the next 6-12 months. And the consensus among startups is that it is better to be safe than sorry when the real impact of coronavirus becomes apparent in the next few quarters.
At present, India has over 470 confirmed positive cases with eight deaths due to the pandemic. While the government claims to be in Stage 2, the country is already witnessing community transmission which is Stage 3 of the pandemic. Lockdowns and restrictions are in place, the number of testing kits is being increased, solutions are being called for with hackathons and funds, and businesses continue to function, albeit from home.
Hence, discussions among startups in chat groups and on social media are now more about coronavirus, ensuring business continuity, planning for contingencies and also chalking out the broad conundrums of managing the cash reserves with doubts on future fundraising.
For instance, Harry Man, managing director at Matrix Partners China shared a few lessons for the India team and portfolio saying that this crisis has had serious implications for startups in China that needed to raise capital to fund losses. If we compare this to the Indian startup ecosystem, most of the Indian startups are dependent on external capital to keep the operations running and many unicorns are cash-burn businesses.
“Investors in China are strongly advising their portfolio companies to extend their runway through 2021 or at-least till June 2021 and everyone is reviewing expenses very closely. Many companies have asked their employees to convert to part-time/ flexible working hours to tide through. In some severe cases, startups have had to cut their expenses by up to 50% of peak spend levels,” Man noted.
After announcing coronavirus as the Black Swan moment, Sequoia Capital had asked founders to plan the runway, find contingency plans and also plan for any emergencies that may arise.
Similarly, Lightspeed in a closed-door online session advised founders to have at least six months of runway and first focus on optimising unit economics. However, if they don’t have such a runway, they were advised to reduce burn by cutting down unnecessary expenses on marketing and even reduce headcount if need be.
Further, venture capitalist Mark Suster said that if this is indeed a black swan, businesses should shore up cash now. Suster emphasised that even amid markets crashing and external factors, the primary reason for companies going bankrupt is running out of cash.
Prashant Mehta, partner, Lightbox has told Inc42 that the companies with strong business principles, strong unit economics and growth will be able to raise capital. But the next round of capital is a far shot for several startups as investors as well as entrepreneurs get restricted to their home screens, in the face of a process which anyway takes months and several face-to-face meetings.
But how to plan best with restricted cash— what to prioritise and why and how? Matrix Partners India’s Avnish Bajaj has noted that there are three possibilities for recovery— U-shaped, V-shaped and L-shaped. V-shaped means a quick and deep fall and a similar rise; U shape is a more gradual down and up; and L shape is that the fall remains constant.
Out of these, Matrix has advised businesses to plan for U-shaped recovery, where companies are expecting a 20-100% drop in business over the next few weeks but planning for lower demand for longer. “With all this, managing burn to ensure runway through 2021 or at-least till June 2021 is key,” the VC noted.
For costs optimisation, the Matrix team noted that marketing costs could be cut by 50%-100%. “Digital services with positive marketing RoI are increasing marketing spend as more people look for digital solutions e.g. edtech, gaming”
The team noted that no costs are really fixed and hence, the startup should re-examine rents, identify payroll cost solutions, rationalise long-term projects, zero discretionary spending etc.
In terms of working capital, it is advised to match outflows with inflow cycle as much as possible. It also advised businesses to avoid deferred payment structures that hit like a bullet payment and take the business down. “Fundamental reduction in cash outflows and matching cash flows” is essential.
The team also advised founders to identify new revenue streams like cross-selling new products or services to the existing base. Further, the businesses are advised repeatedly to plan for the worst, from key personnel redundancies to issues with the access to data etc.
Boston Consulting Group has also issued an advisory for startups amid coronavirus, where for financial resilience, entrepreneurs are advised to manage cash and liquidity. Further, it is advised to ensure cost discipline and revise financial plans and perform a scenario-based stress test.
