Startup Business Planning For COVID-19
For the last year or so, Inovia has been advising our portfolio company executives to be prepared for a change in economic conditions. Although forecasting the timing of a downturn in market confidence is beyond our capabilities, anticipating what the environment might look like after such a downturn is not difficult at all. With 2020’s COVID-19 outbreak in progress and the public markets reflecting a more negative economic outlook, we thought we’d reach out and reiterate our advice.
1) Carry more cash than usual, so that a slowdown in revenue or growth does not result in running out of money before critical proof points are achieved. We have been advising our companies to raise 24, rather than 18, months’ of burn. Also accept that slow or missing proof points will be a subject of greater concern from investors following a downturn. There will be more emphasis on proof.
2) B2B startups must accept that in a downturn, enterprise customers will defend earnings per share by cutting expenditures. Startups should expect that this will result in pushed-out projects, slowed rollouts, and a less experimental, less risk-taking behavior. There will also be a greater emphasis on near-term ROI, including how long it will take for a purchase to be accretive to quarterly earnings.
3) B2C startups may have an easier time, since it seems likely that consumer confidence will take longer to fall off than business confidence (at least, in the US). However, COVID-19 may result in much less travel/vacation, and reduced participation in sporting events, conferences, and concerts. Startups in those fields need to prepare early, since the drop-off in consumer spending in those areas could be near-instant. On the bright side, it likely will not last more than a quarter or two. Still, an interrupted quarter of growth needs 2 to 3 quarters of follow-on growth to re-establish the trend required to convey proof to the next round’s investors.
4) Supply chain disruptions from COVID-19 may be inflationary, as the supply of various products and commodities is reduced. This may play havoc with cost-of-goods-sold, inserting doubt into unit economics modeling and reporting.
5) Whether or not there is inflation, it seems likely that economic growth in 2020 will continue to be affected by echoes of COVID-19’s disruptions. It seems likely that interest rates will continue to be low for the foreseeable future, as governments attempt to stimulate their economies with monetary easing policies. Still, rates have been low for a long time, and it is not clear that monetary easing can help much. But monetary tightening seems very unlikely.
Action Items for startup executives
A) Revisit 2020 and 2021 sales forecasts (including quarterly) to ensure that they accurately reflect the revenues that will actually arrive. A forecast that inaccurately predicts future reality is not just useless, it is harmful, since it will result in the misallocation of resources.
B) In a changing environment such as we see in 2020, revisiting these forecasts monthly seems reasonable, so that deviations from the predicted reality can be rapidly caught.
C) Despite the huge unknowns this year, do not adopt a wait-and-see mentality. Together with the board of directors, reconstruct the company’s budgets and goals to reflect the best, most recent understanding of the environment. If the news is unpleasant, get it out early, so that it may be handled while the company still has plenty of money left.
D) Together with the board of directors, establish trigger points for reductions in spending. If certain financial trigger points are crossed, have a well thought out, agreed upon path that steers the company away from the financial precipice. This is especially important this year for B2B startups.
E) Be on the lookout for troubled companies that you can buy out at a fire sale price, accelerating your growth, or buying market share. Work with an M&A specialist if you are new at this.
F) Similarly, be on the lookout for executive and other talent, with experience in your sector, but working for companies that may be in trouble. If we can put the executive to better use than the other company, make the offer.
G) It’s too early to tell how COVID-19 will affect companies internally, in terms of employees being sick and needing time off of work. Still, it seems prudent to revisit all internal milestone documents, ensuring that there is a scheduling allowance for sickness, including of critical personnel. In cases where continuity of service is critical, it may be prudent to establish a second physical location where service can be continued, such as a remote facility (or even a “work from home” situation). This copes with the possibility that everyone in the original facility may possibly need to be quarantined. If there is a remote team that does not mix with the main team, continuity may be possible even if the first team is quarantined.
This is a time for self-discipline and ruthlessness in management decision-making, yet also compassion for those who fall sick (or who perhaps have family members who do). Be ahead of the upcoming changes. Use these changes as tools to advance your company. Don’t be caught being reactive. Don’t find yourself saying “Oh, yes, COVID-19 is the excuse for our failure to deliver as a company.”
If there is anything Inovia can do to help you through these uncertain times, including helping you re-evaluate assumptions, budgets, plans, and so on, please reach out. There is no such thing as a stupid question, there are only stupid mistakes that get made when questions aren’t raised.
Dan Freedman, Inovia Capital
