AngelCentral Learning Forum: Operating and Surviving in a Recession

The COVID-19 situation wasn’t that pressing until early March when the US Fed cut the lending rate to 0%. That was the clearest sign a big recession is here or imminent. It triggered Shao-Ning, Partner & Chief Angel, AngelCentral to write a blog post on “Building up business resilience during downturns“, drawing on experiences from her SARS experiences in 2003.

Then, the global infection case counts started to really spike, death tolls climbing, and stock markets continue to perform cliff dives. Der Shing, Partner, AngelCentral then wrote a blog entry to both angel members and founders on “Staying financially alive in a crisis“, reminding everyone to stay calm and strategise. COVID-19 has practically thrown most companies’ 2020 workplans out of the window, including that of AngelCentral!

So what if the pandemic lasts to August? or to December? What can be done now or in the next few weeks to prepare you and your team for that? We approached two successful founders – Jeffrey from Patsnap & Henry from Shopback to share their thoughts and experiences so far. Check out the session in the video!

Transcript of Webinar

1:00 

Shao-Ning: I’d like to thank everyone who registered for this. It was actually an effort that Jeffrey suggested. Actually, today, this time we were supposed to do a scale up workshop to support the startups to move from seed series to series A, but because I think the timing was very bad, Jeffrey suggested this panel instead. Henry very gamely agreed when I asked him, “Can you do this interview with us?” And then at the last minute, send out the invites to all our members, our communities, our founders and so, we have hundreds of attendees coming on-board. I think most people know Jeffrey and Henry well but I thought just maybe you two could do a very quick two minutes introduction of yourself.

2:04 

Henry: Hi guys. Thanks for having me on! Henry, Co-founder and CEO of ShopBack. We are a shopping rebate platform. Now we are in eight markets across Southeast Asia, Australia and Taiwan. Last year, we powered about 2 billion in sales. How are we changing as we grow? We are helping users to shop smarter by helping them do comparisons and also to reward them as they shop and also moving into the offline space. So that’s how we are evolving as a company today.

 2:45 

Jeffrey: My name is Jeffrey from PatSnap. We basically, in one sentence describe what we do, we help everything you need to know about a company’s technology and its innovation, you come to PatSnap. So, we analyse all the patent data, journal papers, startup data, and provide what we call innovation intelligence to the R&D and innovation department. So, we now have about 8000 customers globally, and our main bases are, actually from China and London and Toronto. So, we now have about 800 staff globally.

3:31 

Shao-Ning: Thank you both. One of the key questions that, I think on everybody’s mind is that right now is that you guys have been in business for a couple of years and this is the first major issue that it’s on this kind of scale that you’re encountering. What was it like for you when you realised “oh god, the market will shut down.”? Especially for Jeffrey, since you are spending quite a bit of your time in China. So, how did it feel when you realised it really got shut down.

4:18 

Jeffrey: Yeah, all my experiences were quite surreal because I almost face it twice. So, at the end of January, where China first got the CoronaVirus and hit by that, it is near the Lunar New Year. We saw the news and then we started contacting everyone, making sure everyone is safe. During the Chinese New Year period, we started forming a war room to talk about that. Then after, I think towards the end of Chinese New Year, the Chinese government officially enforced the stay at home lockdown. 

So, during that few weeks, all our employees, 500 plus of them in China across four cities, all have to work from home for almost more than three weeks. Then only they start returning back to work, returning slowly in phases as well. Because in China, I think there is really high surveillance. Basically, they have a QR code, where they can track everyone, If you’ve been to any places, there’s colour code. If you are coloured green, you’re allowed to go to work. 

At the end of February, our employees started coming back to work, and now everyone still must wear masks. It’s a government requirement for everyone. For companies, we need to provide masks for our employees and also daily, we need to take body temperatures twice, once in the morning and another in the afternoon and log it all in. 

I will say in general, China, now in March, everyone starts resuming back to a more normal social life and work. But I will say the business definitely has been impacted. A lot of customers delay the contract at the very last-minute or even cancel the contract. Because a lot of them; First they were impacted by China shutdown in February and now they’re impacted by Europe and the US. In March, all our employees in Toronto, in London, in LA, including Singapore, in early March, they started working from home and now the whole of Europe and Toronto, too, everyone is in a lock-down and has to work from home. So that is our situation so far.

6:42 

Shao-Ning: Just now the word you used was war room?

6:46 

Jeffrey: Yes. War room. We meet every day, because this is what we are fighting against. Every day we meet up, we strategize and then one thing I’ll say looking back our China experience, is that I think we’ve done well as when this first started in China, we have made a very key strategic decision to offer all our solutions free in China, particularly we made all our product that we typically charge 50k, 200k a year, free. We are offering it for free until the end of March. 

I think that really is one of the best moves we have made for this CoronaVirus. Because of that offer for free, we have generated a lot more. First, I think we do our part to help out wherever we can. This is more of a social responsibility part. Secondly, I think it really helped with generating a lot of leads as well because for our other peers in the industry, in the business, it was very bad. They don’t even have leads, they cannot close a deal. Thirdly, I think this is unintended, but it works very well because we have this campaign going for free for everyone. A lot of users come and request to use it, it keeps our team busy, keeps everyone focused on serving the customers, instead of feeling the low morale of not knowing what to do and anxiety. 

So, I think that keeping the whole morale up, keeping the whole team together, I think that was actually I think that was the most powerful thing and that’s because of this campaign that we do.

8:30 

Shao-Ning: Henry, would you like to share because you also have a multi-sites office, and I think your customers are actually quite strongly affected in the delivery side as well.

8:43 

Henry: I’ll start with countries. We are in 8 markets and half the markets are actually under lockdown by the government. The other half, like Singapore, I think, short of locking down but very stringent in a lot of measures. So, I think it’s a little bit different. 

We don’t have a centralised war room, what we do is we have localised communications with the local GM as well as local HR and regional HR. So, once a week, or every day, they provide updates. If there’s any, I think. Yeah, so if there are any changes, they can react very quickly on a daily and weekly basis because every country is really different. 

Another thing I think we also did, interestingly, was to conduct fire drills, like three to four weeks ago. We know that the situation is escalating, we know that likely there will be lockdowns, there was one lockdown already in fact. I think it was Malaysia, or one of the markets. Then we say hey, let’s practice lockdown on all markets on a last second basis, so we’ll just say tomorrow is like DORSCON red, and then everyone will pretend they all work from home. So, I think that such a measure worked very well because it allows us to spot gaps early on, before lockdowns actually happen. 

Now, I will say we are almost all working from home if they are under lockdown. If not lockdown, 80% of people are working from home and the last 10-20% have the option to come to office if it’s more productive. And nowadays the human density is very low right? Usually, the next human beside me is like 7 metres. So, it is ironically pretty safe. But we do encourage 100% telecommute given our current setup. As and when you think it makes more sense to be more productive, you can come to the office, but you have to sign in. 

I think we are a little bit behind from what Jeffrey has mentioned, we are still in an adaptation mode. All of Southeast Asia and Australia and Taiwan are all, I will say two months behind China. So, everyone is panicking. How do I work from home? How to be effective? A lot of time now is spent on training the managers on how to conduct remote work effectively and how to make sure there’s regularity in day to day work. We have not gone to do very creative things like offering products for free, which is somewhat interesting, insightful, as well.

11:34

Der Shing: I just want to follow up to that question because we wanted to find out what kind of mindset both of you have as of now. Is it just fire-fight right now or you know, 60% fire-fight, the other 40% actually you and your team are trying to map out what are the opportunities that you can actually, if there are any, get out of this crisis? Or are you still at the fire-fight and then doing the costing analysis to see whether there’s enough cash runway. Take us through the mindset because I remember that back then during SARS and GFC, after we got through the shock, we did the financial modelling, the next thing was how can we kill our competition? Yeah, of course, we were lucky but I think that depends on how badly your business is affected by that particular crisis.

12:28

Henry: In the last six weeks, we can really start to see the impact on merchants. There are two kinds; One would be your general e-commerce, the supply and logistics shops. So, you see merchants who cannot load content of the load and they’ll pull out in the interim and then they will come back on when they can solve that, I think is fine. The other one is travel. Travel is mostly battered as no one is travelling now. So I think once you saw that, the last four weeks was spent a lot on cost cutting measures and I think what we tried to adhere to was the principle of cutting brutally by trying to cut one. 

We try to deliver the bad news, which we actually did yesterday at our mass company town hall. These are the eight to nine things we are going to do and this is how we are going to cut costs and bring it down from here to here. And hopefully from then on, it’s all positive stuff. I think the goal here is to deliver damage at one shot and build up positive momentum moving ahead, so that became the paradigm. 

There’s another team there’s also looking at what you all just mentioned, which is opportunities and how then do you take charge of the situation right, because we adapt this hand and it is just now how we are playing the cards. And I think what they have is that they have a list of ideas that is all about not cutting it down to a very few. So this is not the time to spread wide but is to focus on a few things that we believe can make a big difference. And now I think they are rapidly narrowing down the options to two or three things that they want to double down to really breathe deeper amid the change in this new sort of new world that we live in. So it’s a bit of both. Last four weeks, a lot on the cost side, one on bad news and then building positively moving ahead. And now it’s continuing, I think on a cost cutting, but this will be more minor things that are like G&A and IT that take some time, then it’s all hopefully, all about positive MRR.

14:41 

Jeffrey: I will say my experience is very similar to what Henry faced. In fact, I’m going to have a town hall later today to announce that all at one shot because there’s a saying death by 1000 cuts. We get all bad news in one shot and then move forward positively. Also, the last four weeks, we have been looking into all areas and I see this as an opportunity as well, at least for PatSnap context. The last couple of years we have grown a lot, growing very fast and naturally there are a lot of inefficiencies in the business. All the while since last year, we have been looking at how to optimise it. But it’s not easy when you already turn on the tap and try to turn it off. This is a good time for me to do it in one shot, and optimise everything. It is the best window to go in and at the same time actually, in terms of the market, I’m following my debt free strategy. I also use that to attack our competitors. So use that to double down and then really try to, this year, I call it reshuffling the deck. So this whole COVID-19, we reshuffled the deck and now everyone has a deck of cards. I will double down on things that we have actually like what Henry mentioned. So we will double down in two three areas and attack our competition more, and hopefully can increase the difference between us.

16:06 

Der Shing: As you’re talking about cutting and you know, there’s always a discussion, how do you cut to the bone and all that? And obviously, you have figured out a certain amount, both of you. Don’t need to share the details obviously, that’s sensitive, but it’s based on what kind of scenario? I think a lot of people like to know how and how long your projections for this COVID-19 recession that is happening? Six months, nine months, one year?

16:36

Henry: We are betting on 12 months from today to be a new low. So whatever has dropped to this new low or just maintain, I don’t think people buy less or buy more. So it’s just one sharp drop and after that, another six months of recovery. In our minds, we are betting on the 2021 end of Q4 to get to where we’re at now in Q1. So two years. I think it’s a bit pessimistic to be honest but I’m a firm believer in predicting the worst and if it gets better, you only have a happy story.

17:19 

Jeffrey: Yes, for our case it is similar as well, kind of plan for the worst. We are projecting based on our Q1 kind of experience. So, we are projecting about 30-40% down from our original top line, and then based on that, we try to cut based on that 30-40% discrepancy as well. We also make sure that even in the worst case scenario, we have cash for the next three to four years. 

17:53 

Shao-Ning: Jeffrey, I’m curious about your strategy for these free services. How long did it take you to come up with it?

18:02 

Jeffrey: Oh, pretty fast. There are a lot of details. So…

18:07 

Shao-Ning: Is it something that you are already prepared to do?

18:12 

Jeffrey: Yes, and maybe because of the China environment, I think Chinese entrepreneurs are quite entrepreneurial. This free strategy, we are the first one in our industry, but it’s pretty common across board in a lot of other internet B2B SaaS companies in China. So, there are a lot of details. When we first came up with the idea, until we executed it, about one week. We started launching it in one week. As we have a sales team, all the salespeople went to reach out and say, Hey, are you free, how can we close our deals, impact our pipeline? We have to come up with different scenarios. So yes, we free all these, but if you also give additional incentive, you can still call customers for this and this. So to cover all this, it took about one week to mobilise the team to run the campaign and then do that. 

19:09 

Shao-Ning: I’m always curious about the implication on the staff. So just now when Henry mentioned the cutting back, you don’t cut to the bone but the knees for the staff. The morale definitely is affected when you touch the headcount, how do you manage the behaviour now?

19:38 

Jeffrey: Prior to this announcement or dispute leading up to this event,  we are slowly building up to that. We have weekly town hall meetings shared with everyone since this outbreak happened in February. So at every town hall meeting, I would do it like, “Hey, the economy is really bad”, because a lot of them, I would say, at least for our case, a lot of our employees are millennials that do not really understand what does recession mean to them because they’ve been growing in a good era. We have to slowly educate them on what does it mean when the economy is not good? What does it mean to our business? And then I think with all the news as well, I think, I will say in general, people are expecting it to happen as well, sort of there is some expectations to that. In terms of what we do, when we cut loose on operations, we call it rationalisation. We actually try to scope it within those employees, those are the lower bottom performers. We try to minimise the impact by really choosing employees that may not perform so well. With all these factors, I have to talk to every leader, not just my VP, but actually to get a sense of how they assess their team. 

At the same time we are doing a full review again, full audit on every employee performance. To get a full picture and then discuss with my HR, with my leader, then come out with the final list and we go through it multiple times before we make a decision because this impacts everyone. We want to make sure we really consider everything and and also for example, in London, there is this scheme that funds that if you put an employee on furlough, that means you have them to stop working, the UK government will fund up to 2500 pounds per employee per month, up to three months as of now. So instead of putting them on exit straightaway, we use a government scheme to sort of dampen the effect of these. 

22:03 

Henry: For many of us, myself included, I’ve never been through a recession. So, the first year when I was on an internship in 2009, it was just out of a recession and I didn’t really get to see firsthand. I think it was about being very candid to everyone. I think that’s one thing. 

Another thing we do is that in the last three town halls, we spent quite a bit of time to give everyone a macro economics lesson, like on what’s happening to the US and how it impacts us downstream here, so you can really see the shocks coming down. Actually all these things started that way from the WeWork days. So after WeWork, people are unable to fundraise without positive economics. Now with this, it is even worse, so it is like a continuation. So I think a big part of it is actually education; Going from big picture to nations; economy in nations, to daily lives to companies and then people losing jobs, closing shops and people spend less. These things happen a few times then you have a recession. I think explaining things in very simple terms is really helpful to a lot of us, like to rationalise why we did certain actions. 

Another action that we took was that we cut all bonuses as well as salary increases for everyone in the management team, and this is local country managers. We took it first as we want to make sure that we think of our team first, and we will do everything we can to prevent job cuts. Not to say job cuts will not happen, but this is the last resort. So we are going to cut everything else except for this. I think you know, it would give everyone the bigger picture, the bigger story. It helps you better understand why certain decisions are made and I think that there’s something that I feel is important that we, all of us as entrepreneurs, do for our team. 

The second thing is, I think it’s to hear the narrative straight from the founders or the management. Then, there’s only one singular source of truth or perspective. If not, then what happens is that they read something on Facebook, panic and that’s where the narrative is lost and you no longer have control. I think two things. One is rationalise and the second thing is the consistent point of our source of information.

24:26 

Jeffrey: I just want to add that I totally agree, I think what I call it over-communicate. So, we have to over-communicate and with full transparency to let them know what we are dealing with. With full transparency and honesty, I think they will understand and also controlling the narrative is key, especially for a startup. 

The same text, same message that comes from a founder and another that comes from a senior management team member is very different. That’s why I was just looking at my last night’s schedule. So, I start at 6pm and I have a meeting until 2am. Every half an hour, I had a one on one with all the leaders, explained myself, the rationale, to get them to understand and on board. I think from the founder themselves is key.

25:11 

Teck Moh: So let me just pick up from one of the questions from an attendee. How do you communicate with your investors?

25:22 

Jeffrey: Definitely, we give them updates as well. I will say that there could have been more updates, but because I was so tied up before this, but I do give them an update, a heads up on what I’m doing, the potential revenue impact, and then also what we are looking at in terms of cost cutting, so give them a high level picture, and then share with them some of the things we are doing like the key strategy, for example, the free strategy, some of the things that working so I think this is sort of communicating with them every 1-2 weeks, so as to let them know how we are actually dealing with it, and we have a strategy for that.

26:11 

Henry: I talk to them on WhatsApp so it is easier to clarify. Just share very broadly as I think what they want to know is the business impact. So how much for example, commercials have dropped? And the second thing is the same point, what are you doing? And I think it is just keeping them updated once you have made a decision. 

I think that another thing we did is to reach out to certain investors for help when we think that they are good at certain elements. So where some investors have been through recessions before and just this morning, I was talking to a new potential investor, not even a current investor, on how they should think about or react. 

One thing that struck me was that I realised that the matured companies act very fast. Look at the airlines and banks, they fire their staff very, very quickly, they drop all the cost down to minimal in a very short span of time. But if you look at all the startups, no startup has done it yet. 

All the startups are padded by venture money so we have a lot more liquidity, right. And sometimes, I think that startups are not as firm or rather, the management. I mean, like my staff, we’re all new to this and we are not as decisive. I think that would be our counter argument. I think a lot of it is also just finding people who have much more experience to give a perspective then taking a decision from there, then proactively communicate your decision with the investor and to your company. 

27:47

Der Shing: Actually, from the investors side, I would just like to add for the audience that actually we really do appreciate over-communication from the founders also. So, very few investors actually have the attitude to blame or try to get pissed off or anything like that. Most investors are very rational and actually what we want to know is just what’s the impact like Henry says, and what is the plan? What are you doing about it? What’s your revised projections? And you know, if there is value add, we can give you, we are actually more than happy to give. 

In terms of cost cutting, whether it’s the right amount, not the right amount. Of course, you have to listen to the investor and know where he or she is coming from, and then see what fits your circumstance. Right, but definitely over-communication is very appreciated. And on the same topic, there’s a question that I think Magda asked on the chat. She was saying that today, the two founders actually are running pretty big companies already. Right? How about if you are a startup now that doesn’t have that kind of liquidity, maybe you are more than halfway through your last round. And, you know, is there any sharing that you will want to say to, you know, to founders who are in that kind of situation right now? 

29:18

Henry: I think if you have less than 12 months runway, you should definitely not use your old top line estimates or your current BP, as your inbound revenue. 

Unless you’re in some special sector like mask production or something that has to do with the current situation, you should almost certainly predict revenue shocks. With revenue shocks in place and your runway is less than 12 months, I think you should consider very severe cost cutting. You should consider cutting down on staff, I think that’s definitely one, in order to survive, because I think that in the next three, six months, it is almost impossible to fundraise. I think investors will all watch and wait and if you don’t make that decision early, by the time you need to make a call, you do not have enough time. That is if you have a much shorter runway, better to face the hard decisions now. 

In the last 6 weeks, I have had almost 10 calls with earlier stage startups where they faced these situations and sad to say that half of them don’t make it and there will surely be more. So, this is definitely a time to make the difficult decision early on.

30:49 

Jeffrey: Yeah, I agree. If it’s less than 12 months cash, should cut it severely, act decisively and act as soon as possible, there is no time to waste, will have to act decisively.

31:06 

Der Shing: I also want to add because I do agree with Henry, that sometimes, because we’ve gone through 10 years of boom, and I actually have met founders who are still in this, as of yesterday, still have not cut headcount even though revenue has dropped 80%. I don’t know what they’re waiting for. Honestly, right? Sometimes you have to conserve your cash, and so that you can live to fight another day. I think if you listen to the timelines, everyone is saying, we are looking at at best early next year, then the economy starts to come back in any meaningful way. And that’s if we are lucky, right? If we are not lucky, then I think Jeffrey is talking about 3 to 5 years, right?

32:00 

Shao-Ning: I want to go back to the question on how you’re feeling about this whole thing, right? How is it impacting you personally? Because one of the key things about founders is you are the person to solve all the problems, the bucket stops with you. Unfortunately, chances are that investors now will just be – if you have a good investor, they will look at you and smile at you and try to sort it out with you and have that half an hour conversation. But the work still got to be done by you. So, how are you doing and how are you feeling?

32:59 

Jeffrey: Like what Henry mentioned, maybe because we have bigger operations in China. I think every one of us went through the stages of self denial, acceptance, grief and then slowly came back to problem solving. I think because of our China exposure, we got there pretty quick, looking at all these, how is problem solving an opportunity. 

Personally, actually, I will say it works better for me. For those of you who don’t know, in the last few years, I’ve been travelling every week to London, to US, to China and because of the COVID-19, I’m grounded in one place, and actually have better time to think through stuff. 

In fact I’m busier as I’m really jumping from meeting to meeting like back to back. While in the past, a lot of time was wasted on the road. Actually, I find that it gives me more stability in a sense. Being in one place can be better but actually my workload increased and it definitely is a big stress because everything is hinged on the founder to make the right decision. 

My confidence and faith is on the team. So, throughout this whole experience, not just myself, I’m working with my team, closely consulting with them to get their input, and discussing together and also quite comforting to see the team really come together, closer, during this time. That is also a good thing because everyone has a common enemy and then we face it together. So overall, I will say, I see it that this is another experience of running a startup.

35:17 

Henry: I think for myself, two points that are very, very similar. One is that I  actually spent the last 2 – 3 years flying every week. Now for once, for the last 6 weeks, no travels. So that was a big change. 

I think the struggle actually is communicating with the teams that are abroad, or at least for myself, though. I never really felt that video conferencing is the best but it is the best for what we have now. Once we got over that, I think the other thing that is really very comforting even in these tough times, is that there’s a very clear focus. 

I’m also not alone in this journey, my other co-founders, other people in the management team also are helping to hold the fort. One thing that I found very comforting was that half of my management team have gone through this before. This is not their first time and they were able to share the measures they took the last time. Some of them said it, certainly startups, like four or five years ago faced liquidity problems and they made difficult calls very fast. Actually, today, they’re all unicorns. So that was actually very interesting. They were all the employees in that company so they were able to share the details. From there, we can reference and learn even from within the company to solve the problem. Definitely stressful, but I think to some extent is about being calm and just taking on. The realities are very different from the past and no point crying over spilt milk but be rational and to Jeffrey’s point right to be decisive make a call. If it is a difficult call, you seek one or two consultations. I think one thing we could have done better was to act faster. So we took about 4 or 5 weeks to nail down the cost cutting plan which could be done in about 2 to 3 weeks if we were a bit rigorous from the get go. 

37:36 

Shao-Ning: There’s actually one question on our Q&A where one of the attendees asked: Do you see deal tones changing now and in the next 6 to 9 months, i.e multiple liquidation preferences, valuation stresses etc. Are you sensing this from your existing investors or from your experience as a fundraiser? What’s your take on this?

38:03 

Jeffrey: Definitely Yes. If I were an investor, I would do the same thing. I think the market is starting to get a bit more much more rationalised. And as an investor, I will take a more cautious stance; I will talk to you, I will want to learn more, but I will wait and see. I think all investors will have the same approach. So I think, I will say the best time definitely is over. I think we have to make the assumption that the best time is gone. Moving forward, it will only be not as good, if not worse. I think we have to be realistic on the valuation expectation on many other aspects of it as well.

38:54 

Henry: I think what could differ is the due terms for different stages might be a little bit different depending on the stage. I think early stage probably not much difference. But, the mid stages, later stages, I think we will be a lot more selective, especially on profitability, for sure. 

I think the good news is that because a lot of startups won’t make it, so actually investors have much fewer options. It will lead to a very interesting supply demand problem. Privately, I think one thing a company should care less is actually valuation as there are many, many other things like liquidation preference, control that can really kill you much more than valuation can. Valuation I think, is just a number. At the end of the day, It’s about ownership control, these are a lot much more important. But for sure, I think the dynamics are changing and it will be much harder to raise.

40:00 

Jeffrey: I totally agree actually, in every term sheet, there are economic rights and there are control rights. All the liquidation preference, valuation is just about how much – who makes how much money but more important to me personally, I will say 10 out of 10 times I will trade control to valuation to price. 

The second point I want to add is that, from at least the investor I spoke to, a list of company funds or big private equity. I know there is still a lot of dry powder, so they still have a lot of money. Everyone still raises a lot, raised a lot of money from the LP so I think we just have to hang tight, get through this year and still show that even under tough times, we can still grow, we are tight, we run very lean and investors would still invest in you but just maybe later down the road. Not now, not later this year.

41:04 

Der Shing: I just want to add as an early stage investor, generally speaking, I think there has definitely been a wait and see going on already but I believe early stage investing will probably still carry on with valuations plus minus a little bit but more on the minus side. I think the bigger picture to look at as someone mentioned in the chat just now is that there is a rerating going on. So we will have to wait for the public markets dust to settle to see how the risk appetite of the investors, global investors are. Is it now we care about profit the most and therefore, we give higher P/E ratios or maybe even lower P/E ratios but at least these people will invest in Facebook, Tencent, really profitable companies? Or is it a case of no, there’s still a lot of appetite for fast growers, but maybe it is no longer 12 times multiples but now 9 times multiples. I think that one you have to wait and play out. You can see it happening in Uber; the big loss making ones are the ones that have huge variance. The profitable ones actually are still reasonably stable. It’s more or less just rerate to the drop in GDP. So something to take a look at but unfortunately, it will take time. So yeah, it’s definitely not going to resolve itself in six months.

42:18 

Shao-Ning: Okay, we have one question that has been waiting for quite a while on the Facebook side. And then we also have one question that is more on the operations side, the B2B operations side. So the first question is what did the various companies do in normal times that made you able to take the current action to exploit the current situation? I think it’s very similar to the question that I asked, were you ready to do the free trials even during normal days and that’s how you could implement it so fast and implement the details. And the other question is similarly on the operations B2B side, how to generate customers for enterprise products in the time on lockdown and social distancing. 

43:09 

Jeffrey: Yes, to share a bit on how PatSnap does our go to market, we have inside sales teams across the world. So, our salesperson actually stays in the office and calls our customer for a web demo and then closes the deal. Actually in terms of sales, everyone can still continue the sales. But now the difference is that they work from home. It is definitely the interest of the customer or the reception of the customer as now you call them, it will be harder.

44:15 

Henry: For us, I think it was a slightly different because this is probably the 2nd or 3rd week of lockdown. A lot of our measures are still reeling in from the change. It is a little bit lesser, a bit earlier in a timeline compared to PatSnap. PatSnap is later in so people kind of realised that this is the new norm. So I don’t think I can comment much on this. 

I can say though, that for new sales is tough, but for current sales, your current accounts, you already have a contact so it’s actually not that different. It is all about adjusting the budgets. 

For new accounts, I think some industries are in dire needs, like F&B,  so they will be very open to having chats. But if there is a national lockdown and then the whole sector will also shut. It’s very sector dependent and country dependent.

45:12 

Shao-Ning: There’s one question that is actually going back to the cost cutting just now. So the order of magnitude, how much do you cut 35%? 50%? 85%? 

45:23 

Jeffrey: For our case, I will say that it is closer to 30 to 40%. 

45:35 

Henry: Similar, 30-40% for us.

45:39 

Shao-Ning: So this adjustment is from your revised modelling, right? 

45:48 

Henry: This is from Jan to March, the drop is about 30% and in April, we are carrying on to cut. It should be about 30-40% projected from the original BP. 

46:04 

Jeffrey: Yep, same for me, it’s 30-40% compared to our original budgeted plan this year.

46:10 

Teck Moh: So, I got the same question for the two of you. What are your considerations for choosing 35% or 40%? How do you model your revenue drop, your costs and how do you extend your runway? for how many months? What are the considerations for you to choose your percentage?

46:34 

Henry: I never choose a percentage. So what we did was we take headcount, management take a cut and everything else we just built from zero up. So, we assume we start a new company and then ask ourselves why we need this, what can be renegotiated and then from there we build it up. 

The other bucket that we have is that we are B2C so there is marketing. We introduced caps in each market. If we are a bit unsure, what we’re doing is we reduce that payback period. Then, at least we have an interim measure for April that we can watch and wait. It just so happened that when we did it this way, the overall drop was about 30% to 40%. But we really broke it down to headcount, G&A, marketing and IT and then everything except headcount, we built up from zero up.

47:28 

Jeffrey: Similarly, we looked at different markets. We first looked at the China market, our China market has its own P&L and based on what will be impacted, and then we look towards the impacted growth. The same for the US and Europe. Based on their market, what we expect we can do with some assumptions, of course, and then from that assumption, we work backwards and see what kind of cost cutting. What is the target for the cost cutting, then we’ll go from there.

47:59 

Shao-Ning: Thanks, both of you. Really, it’s actually a very insightful sharing. And just one last question that we see on the Q&A. So for the attendees, if you have any questions you can quickly put in otherwise I only have one last question. This question is what are the top three long term implications that you think will be on the startups in our ecosystem in Singapore? 

49:22 

Jeffrey: I will say not just start up in Singapore, I think I look even wider. A few things I will say, maybe most of you will agree to that. 

I think working from home will be a new norm. I think the way we work, how we treat work, I think that will be a new norm. So in the past, actually, just last night, I was discussing with our senior leadership team. In the past, we actually strictly did not allow work from home because we believe that people coming together to spend time together, building chemistry is very important. 

Actually now that with this, we are revising this and how we start thinking about post COVID-19, how we are working towards that because we also have a few leases, office leases and London rental is not cheap; $1-2 million a year. So, how we can actually start planning for that. And yes, be prepared for a new future, a new norm after COVID-19. 

This thing will pass and what do we do with that? I think that is what we should start thinking about. In terms of startups, I will say for the startup context it is really going back to basics. 

As a business we need to learn to make money, to generate profit. At the end of the day, as a for profit organisation, we need to make sure that what we do, we create enough value and generate profit. I think the way of burning money and the way of what I call the “champagne time”, is definitely over. Every single cents we spend, how we look at operations, how we look at customer acquisition costs, all this I think just makes us go back to basics in my opinion, and we have to treat the basic right.

 51:30 

Henry: 100% agree on the making money part. I think if it is not positive economics and cannot be profitable in a 1-3 years time, I think a lot of investors will never back it lest a game or groundbreaking idea or as revolutionary. So I think that’s one point. 

Second thing, I have a slightly different opinion about work from home. I definitely, like Jeffrey, we have a no work from home policy prior to COVID. COVID made us realise that it is actually functional. Is it the best? I don’t think so. But it definitely showed that it could work! There are some things that I think we are starting to realise. Maybe it is possible for some setups and not possible for others. And how do we make it more efficient? Because I actually think COVID will last for some time. It is not going to be something that lasts 3 to 6 months as we work from home, it could be sporadic, on and off. 

I guess for us specifically, we are being more open minded about it or still doubtful about its effectiveness but open minded for sure. I think one thing that will surely happen for startups, post this, not just for Singapore but most of SEA is that people will now raise for much longer runways. I think in the past, people raised for like 12 months to 18 months, but post this, people will raise for 24 months to 36 months even? Because what you want is to make sure that you are not at the end of funding. You’re running out of runway and then you’re caught off guard by a macro shock, which I think is happening to a lot of companies now. So I think people will learn and take it small, even if it comes at higher costs.

 53:23 

Jeffrey: I remembered Henry and I were just talking about this a couple months back about fundraising. I think to tie into one of the questions I see, for a company that’s currently profitable, already frozen hiring, revised spending, should we take the action of cutting headcount? I think we still prepare for the worst and in terms of fundraising, we raise money when we don’t need it, when you raise money when you need it, that is the worst position you can be in. So I think and with that, actually with that question as well, I think we should, I will still say prepare for the worst for that, so that we are not in a reactive position.

54:14 

Der Shing: I do want to just add on a little bit because I think it’s been a bit bleak, you know, listening to Jeff and Henry. Obviously it’s very tough times, but they are shouldering it, leading the company very well. But I just want to remind everyone that actually, economies do go in cycles. This is not the first and last big bear market and depression we will go through in our lifetimes, especially if you’re not in your 30s or even 40s. 

Actually, I disagree a lot on the small stuff in terms of what really has changed. I suspect humans don’t change very much. There’s a thesis I have. People always want to win against other people. There’ll be people who always want to get very rich. So there will also be people who always want to socialise. So then the question is how we move our businesses to fulfil the different needs. And I think that people that react well in crisis, usually are the ones that will do and build really big businesses, as the bull comes back and the bull always comes back, just how long it takes. You can do the research and read up a bit more.

55:24 

Teck Moh: I’m very encouraged by the two founders. To talk about new opportunities that have come up, how do you come up from this recession? Stronger and better versus your competitors? So, maybe you can have a conversation with us on what you think are the opportunities now that you can take advantage of to come out better?

55:54 

Henry: I think this question is better re-visited in 6 months time. But, if I could add to that short of mainly specifics, right? We see it as a great time to fortify positions because actually your competitor cannot fight as hard. Especially if you have liquidity to run. Yeah, but that is just money and capital. So the actual steps, I think we are still in the midst of finalising. I think the only difference between now and maybe the past is that in the past, maybe you can fire five shots. Now maybe we can fire two, then two or three that you choose to focus on, we better be very clear. Because now you have a lot less resources to do what you want to do.

56:45 

Jeffrey: Totally same with Henry. We will only really tell 6 months, 12 months later. But exactly the same. Fortunately, both Henry and I are in a very fortunate position. We have slightly more liquidity. I think using this opportunity to fortify ourselves and fire more focus shots.

57:07 

Der Shing: I just want to tell you guys to hang in there because I went through a pretty bad, two bad recessions I think Teck Moh definitely, SAS and GFC. Actually there are silver linings, for example, the war for talent will disappear more or less, it will not be a big deal anymore. The pressure to forever raise costs will disappear. So, it does require a big mindset shift, which I think you guys alluded to, it’s linked to being profitable. It’s not all bleak, just have to hang in there.

57:38 

Shao-Ning: I think from my personal point of view. For me, personally, it’s what I always try to remind startups. Startups are not a special breed of entities; startups are businesses. So, it’s very important that you drive for profitability, drive for cash flow, drive for liquidity. You cannot bank on investors for that cash flow drive all the time. That will be a very unhealthy mindset and I think it takes a situation like this, for us to remember the fundamentals of a business is to sell; is to manage your cash flow. 

So with that, actually I realised that last question seems to be more directed at investors. I’ve been thinking whether Teck Moh or Der Shing wants to take this one. How is the dynamic in early stage fundraising in Singapore right now? Do you see interesting deals are coming or even closing?

 58:40 

Teck Moh: I will share my personal view, the deals have not actually come down a lot, especially the early stages. I think the founders still don’t realise the situation yet, so, I still see the same valuation, high valuation. 

Actually, I’ve only seen one new term sheet in the last three to four weeks. And the term sheet that came up was 30% discounted over valuation, and the total amount of investment is halved. So, my sense is that most of the investors are much more careful now and they feel that they cannot support the valuation. And when I asked the VCs, Why do they reduce the valuation? Are you trying to take advantage of the situation? Their rationale actually makes sense for me. They think that the valuation is pecked on what they are likely to achieve over the next 12 to 24 months. And in this current situation if the startup cannot deliver the kind of KPIs that can raise the next round, then they cannot support the current valuation. 

The other thing my view is that most VCs are also keeping their dry powder to support their portfolio companies. So, I think the term sheets will come very slowly and I think VCs that are well funded are trying to be careful. I think that they’re watching to see what’s going to happen over time.  

1:00:33 

Der Shing: Yeah, totally agree with Teck Moh. I think that just the only other thing to add is you have to look at the public markets to see where the answers are because the public markets are the exits in the form of IPOs. The public market guys are the ones that are doing the big trade sales of the bigger companies. So, if these two are not coming, and they are actually in pretty bad shape right now, definitely it will cascade down the entire VC chain right all the way to angel investors. 

So, it is back to what Henry and Jeffrey said. I think the thinking should be that, hey, we should go build something that gets to profit fast. Because once you’re profitable, you’re actually not beholden to any of these fundraising schedules, which is how I think 80%-90% of all the SMEs run anyway. So something to think about. Pre-2010, actually, the entire ecosystem was just made out of companies that are profitable.  

1:01:29 

Teck Moh: Okay, so maybe let me make an additional comment on this. If you are a founder and you’re trying to fundraise now, and it is very difficult, you cannot fund raise, then come back down to how much you can fundraise among your 3Fs round. Then slowly build your business because there’s a lot of talent, which is available in the market at cheaper prices now as well. So just go slower. Use your fund that you can support the company and get going. 

My sense is that the equity market could still have much more round to come down. So I was just having this conversation – The S&P is down 25% versus the top value to now, 25%. Look at the 2000 and 2007 down rounds. 2000, the round was down 48%, 2007, the round was down 58% and do you think that this won’t be better than that one? So my sense is we need to ride out this roller coaster. It won’t stop now.

At AngelCentral, we have put together a list of resources: https://www.angelcentral.co/covid19 (some from our own efforts, some from the ecosystem players), to help the startup community push through this tricky period! If you have any resources to add, please email us at support@angelcentral.co!

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