First post for the year and it’s against a backdrop of great uncertainty and fear in financial markets, business world and society in general. The COVID-19 coupled with the oil shock has as of today resulted in a paralyzed, shellshocked West and a winded East. What i have learned going through 2000 tech crash, 2003 SARs and 2008 GFC is that pendulums tend to swing to the extreme aided by self-reinforcing fears and panic. This does not mean that we should be cavalier about things and just work on a best case recovery assumption. Rather it means we recognize this crisis while large is not a world changer in any meaningful way. Yes some governments which are inept may be voted out, some people/companies will go bankrupt and most sadly, some people will die of the virus who could have been saved if we acted differently. But this will not change the world like the way democracy or religion or even the internet/iPhone did.
So what should we do as investors and startup founders? First investors, take it easy and slow and have a plan as the market gyrates. Cash is king. Invest following whatever your personality fits best. Some people buy the way down, some buy the way up. Most important, do not Over-Leverage!. Never have to sell a financial asset due to margin calls or daily expenses. For our situation, we have a hard cap of 28% on total leverage on all assets. You need to figure out your own.
Second, keep to your asset allocation. A balanced portfolio or conservative portfolio would actually have only seen a 3-10% drop YTD. It’s just part of last years gains. Compare this to stock market drop of 25% and some individual stocks drop of 50-80%.
Thirdly, keep the diversification. Don’t own too much of one counter or industry. This means no single stock risk more than 5% of portfolio for me. Personally, i am prepared to buy 5 times of ETFs, dividend stocks and technology stocks all the way from S&P@3000 until S&P@1200 and STI@1200. This is below GFC levels substantially and at that level will involve some careful leverage (30% max) and selling bonds. It also involves being much picker. Why buy speculative loss making tech like EB or ZEN or Z when you can buy AAPL, BABA, FB, GOOG, AMZN at super discounted prices? This means at current S&P 2400, we have action plans for markets falling much more.
As for private equity investments like startups or VC funds, we have always espoused keeping to just 5-10% of net worth and to put them at book value. So these should continue on maybe at a slower and more careful pace. Esp if you are investing in early stage startups, i would argue valuations will get better and you can get better quality founders in times of crisis. No wantrepreneur would run a startup during bad times!
You are in a much tougher situation. A few will be lucky and have huge demand due to your sector (healthcare, delivery, cleaning etc) but most will be in reverse situation. The most important thing i can share is to take action and control of your destiny. Don’t be passive and hide or be in denial. That will be worst attitude to take. You need to act on revenue , cost and cashflow to tide through this period.
Second, estimate your cashflow. Make sure you have enough cash to last at least 18 months. If you don’t, cut costs and drive revenue until you can. Assume no more new investment money coming in. At the same time, apply and get credit facilities that will help you get cash in quickly. Now, some founders balk at personal guarantees required to get credit, all i have to say on this topic is do you have proper shareholding alignment and are you a wantrepreneur or the real deal? Don’t forget you raised capital convincing investors this is your do or die.
And even if you do have the cash ( i know many more fortunate startups just raised capital), I suggest to still try to cut costs and extend it to 24-30mth. Do a worst case scenario and an average case scenario planning. Then create trigger points where you take certain actions.
Third, some actions you can take should cut across all functions and levels so that it is clear it is an all company effort. Management lead by example. So if you cut salary, cut your own the most first. It gives your moral authority. If you don’t agree (see the point earlier about personal guarantees). Areas to watch and change include :
Manpower Cost– salary reductions/freezes (use the MVP component) , no bonuses declared, no pay leave, headcount reduction. For example, I just saw a early stage startup advertise for chief of staff role. What the hell?? The only Chief of Staff i know is in the US Cabinet. In bad times, founders need to roll up their sleeves even more so that the correct tone is set in office
Marketing Cost – Cut marketing expenses to something commensurate to revenue. Don’t try to grow ahead or just rely on LCV math. For example, if you normally spend $10K per month on conversions, try to spend $6 or $8K and just get the more profitable leads, don’t bother with the expensive ones. And drop branding related advertising spend as much as possible,
Other Cost – Rent. See if you can make it 2% of your total expenses if you are a pure software play. Do you really need downtown or co-working location? We had about 100 staff in 4500 sqft of space with meeting rooms and storage area and pantry. Be cheaper than us.
Other Cost – Staff welfare expenses. Do you really need to spend more than $200 per staff per year on welfare? A lot of team bonding activities can be free. This is not significant but it is setting the tone.
Cashflow Management – Create packages that collect cash upfront. Chase AR religiously and don’t be the bank for your clients.
Strategic – Stop overseas expansions and maybe close down new product lines or geographies that do not generate sufficient cash and which keep burning.
Talent – top performers should still get recognized, paid well and maybe even get some bonuses and increases. Use the opportunity to remove bad performers.
The above areas are all cost linked. Frequently, my experience is that cutting just helps you become more efficient and a downturn is a good reason to test your efficiency. I honestly feel most startups today behave like an MNC in terms of perks but without the commensurate revenues and profits. What is critical is that you communicate the reasons for all the changes. This will be a good time to see if your staff trust you and whether you have built a good culture of teamwork and togetherness
Next, is revenue side.
Sales – If you are a startup with product market fit already, the one thing you don’t cut is performing sales. If you can sell your way aggressively out of a recession, you tend to become very strong. For example during GFC, we created specially discounted packages to go after SMEs with a tagline that we are here to help them. At same time, we reminded MNCs and Govt that had recruitment freezes that even if not hiring they should spend a bit of money on employer branding so that when upturns comes, they have improved their employer brand.
For sales, this is also an opportunity to fire bad paymaster clients and replace them with safer clients in terms of payment terms. Remember Honestbee. They can always fold and don’t pay. Then you need to write off the AR. That is even more painful and it’s usually better to not have that revenue in first place.
Sometimes, it’s just bad luck. You are in a sector that is really bad like travel or tourism. Then i would argue your leadership and strategy matters even more. As a small startup you have huge overhead and cost advantage over your big competitors who will be feeling even more low morale and burning even more cash. They will be pressuring their sales staff, cutting headcount and removing pantry benefits. This is the best time undercut and out sell them. If you have sufficient cash in bank, i would argue it is the best time to grow market share. This is exactly what happened from dot com crash in 2000 to 2006. The job portals basically stole SPH lunch in terms of recruitment advertising revenues.
One caveat though. If you find yourself mentally breaking down (much more than normal stress) or if clearly cash balance is not going to make it, there is no shame in calling it quits and shutting down. And please assess risk properly, don’t wait until you owe employees and fellow SME owners lots of money before shutting down. That’s called self- denial, selfish and irresponsible!
Hope this sharing is useful. i may sound a bit extreme in my cost cutting thinking but it actually how most very profitable SME run. It’s time our startups learn to do the same and who knows, maybe we will have a surge of profitable startups emerging once the winter ends. Imagine being so well run, you can fire your VC and not need to raise anymore!