Steps to take now to prepare for the COVID Recession

It’s happening as we speak. Last 1-2 months, many startup management teams and boards have been in emergency strategy planning sessions to figure out how best to navigate this deep downturn. And because data is coming in fast and furious in this new connected world, it can sometimes be tempting to wait for more data before doing up a revised plan for this year and next.¬† Don’t be tempted. Do it now!

Ning & I have been on many video calls with our portfolio founders last 3 weeks helping them figure out what is the best path. I want to share our thought process and some steps today to help fellow founders.

Step 1 : Assess your situation.
Use latest sales numbers last few weeks to figure out the level of slowdown you are facing. So far it looks like travel is almost 90-100%, Events / F&B is 40-70%, B2B SaaS software around 30-50%, media up on traffic but down on spend=net down 10-30% expected and e-commerce/delivery/healthcare/edutech all doing better than expected. The list goes on and it will be interesting to see the follow on demand shock and wealth reduction effects on p2p lending and other fintech businesses.

Get a clear handle of your costs and start to think which can be cut. Get a calculation of the time frame and amount of wage and rent subsidy.

Step 2: Make a reasonable projection on forward revenues and collections for various scenarios.
Assume the recession will result in depressed sales for 6 months (base case), 9 months (bad case), 12 months (very bad case). You should make cashflow projections for all 3 cases. What this means is for eg if 1Q2020 sales was $300K. But it’s falling off a cliff for March say to just 50k entire March . Then for the 6 months scenario, extrapolate April-Sep will be just $50K mthly. Then project some growth and recovery from Oct – Mar 2021. Apr 2021 onwards back to $120K a month. Thats for base 6 month case.

Step 3: Project out a 24 months scenario and reduce costs
With step 1 and 2, you can project out 24 months and see how much cash you will spend each month factoring in grants, reduced sales and collections. Next step is to reduce costs until you meet your desired goal. We are asking our startups to execute a plan for 24 month runway now. You figure out your own.

Step 4 : Get credit line. Then SELL AND INNOVATE OUT OF THIS CRISIS
Start applying for credit lines if needed to shore up finances. At same time, see if there are opportunities to grow other types of sales. During the GFC, recruitment advertising plunged. But employer branding budgets were still present in select FMCG, Govt, Tech sectors. So we created brand new packages that gave them branding. Interestingly branding packages were worth a lot more than recruitment ads and they helped us a lot. Go full steam to acquire clients.

Step 5 : Track cash and new metrics in months ahead and tweak plan as things change
Self-explanatory.

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Additional Point 1  РGet a handle on collections and clients.
AR is not cash. AR is you behaving like a bank when you are not. You need to do 2 things.

a) Chase down all the old AR and stop selling new contracts to clients who are not paying. This is particularly critical now especially for fellow startups who may not have runway left. But they will continue to consume your services if you let them.

b) Shift sales to sell to clients who can pay upfront or good credit. Divide your clients into 3 segments. First segment is the bluechip profitable MNC and govt clients. You can continue as per normal getting their sales and even extending usual AR timing. Second segment is normal customers who have always paid up on time and who deserve some trust. Third segment is unknown or risky credit clients. For group 2,3, you can still do their business but ask for cash upfront. You can even give a discount for it. It will work out better that way.

Additional Point 2  РDeliver all the bad news transparently  in 1 go and lead by example
It may feel correct to cut down costs and manpower as the revenue falls but that is not good for morale. Do it all in 1 go at the front and make sure management takes the biggest cut. At the same time be very transparent and over communicate everything. From the economy, how it is hitting company to your thought processes.

From there on, it’s off a low base and things hopefully keep improving. If it turns out the 6 months scenario is wrong and it’s a 9 months, then do another cut 6 months later. But not small cuts month by month.

Additional Point 3 – If you are removing headcount, make sure it is done legally and humanely. Explain to remaining staff why. And yes, of course take the opportunity to remove poor performers.

Good luck to all fellow founders and see hope to see a wave of cost efficient and super battle hardened startups when we emerge from this downturn!

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