Startup CEOs: Inaction is not an option.

Venture-Backed CEOs: An Approach to Planning in a Coronavirus World

If you’re leading a venture-backed startup, your job just got a whole lot tougher. As the CEO, you are expected to make the hard decisions to protect your team, your company and your shareholders. In the current health and economic crisis, you have to make those decisions with imperfect information and no certainty. And — this is probably the most difficult part: you have to make those decisions in an emotionally charged and deeply dissonant environment.

This is not what you signed up for.

You developed a great product that serves a real need in a big market. Your customers love your product. You recruited a great team that believes in you and your vision. You successfully raised venture financing to grow your business. The 2020 Operating Plan is approved. All your board meetings are scheduled. If you hit your 2020 goals, you’ll get your next round.

Now, everything has changed. You’re no longer playing for your next round: you’re playing for survival.

There is a path to get through this. Here is a framework for you to consider:

Be Empathetic: Understand what your stakeholders are experiencing — and demonstrate to them that you understand through your actions.

For employees, the crisis is existential. The speed and depth of the change has shocked even the strongest among us — and strikes at the core of our most innate human survival instincts and fears. How do we provide for ourselves and our families?

Your employees deserve (and need) the truth from you. No sugar coating: You will have to reduce your team to get the company through this. When you cut or furlough, try to do it once — and be as generous as you can with severance and health benefits. If you can, have these conversations yourself — and express your gratitude and compassion and sadness. Then, wrap your arms around your remaining team and lead them by example.

For investors, the crisis will divide their portfolio into two: companies that “survived” Coronavirus; and, those that did not. It might seem like a blunt instrument to you, but they will push you hard to cut costs. They’ve seen this before. Cut way deeper than you think you need to… no one ever cuts deep enough.

They will tell you to throw out your 2020 growth plan, discount your current revenue by a large percentage that seems crazy to you, and cut costs to extend your cash runway to no less than 24 months. And, they may be right, but you have to go through the process of developing a plan for what the business is during the downturn, how it emerges from the crisis and what it becomes — and you have to bring your whole team along with you.

Your investors are motivated to keep you on the “survival” side of the divide because they have investors — and they’ll be graded on how many of their companies make it through. The only real metric that matters at the end of all of this is cash-in-bank, translated into ability to restart and compete with little or no additional cash. Let your investors know you understand their goals, that you need to be diligent, that inaction is not an option, and that you and your team are working on a plan to get the company through this crisis — one that preserves value, optionality and cash.

Then, take action:

Execute on 1st Level Cost Cutting:

1. Make the “easy” cuts: these are variable expenses like food, entertainment, travel, marketing budgets and unnecessary consultants. Hopefully, you’ve done this already.
2. Material Contracts: review all your agreements, prioritized by monthly spend. If you can live without any of them and can terminate, then terminate. If you can’t live without them, renegotiate pricing or ask for a payment deferral. This goes for your property leases as well; instead of playing the force majeure card to try to get out of your lease (more on that in a later post), try to negotiate a reasonable deferral.
3. Service Providers: Reach out to your accountants, lawyers and other service providers and ask them to lower their hourly or flat fees (or defer their payments) as you navigate through this challenge.
4. Debt: If you carry any bank or venture debt, reach out and ask for an accommodation to preserve cash: offer interest only or ask for a deferral of all your payments — for 3–6 months. If this is not long enough, you can revisit later, but you need to stop making these payments immediately if you can.
5. Do this all quickly. Everyone else is.

Do your Scenario Planning:

1. Develop a Survival Plan for an “L” Shaped Recovery: This is the real “worst case scenario” — a structural change that slows growth even after recovery. In this scenario, you are assuming negative growth and retaining only the core of your company to preserve as much cash (and optionality) as you can. Think: a 9–11 type of shock but global and over a longer period of time.
2. Develop a Survival Plan for an “U” Shaped Recovery: This is the recession scenario in which growth rates return to pre-Coronavirus levels but only after a period of recession. This scenario assumes a sharper return to growth sooner than the “L” shaped recovery. In this scenario, you are taking care of your remaining customers (including adjusting terms), retaining your core capabilities and team, diverting R&D resources to addressing current customer needs or developing products and services that serve customers or agencies addressing the current crisis. Think: 2008–09.

Align with your Stakeholders:

1. Work with your direct team and board (the full board, not just the investors) to agree on the “triggers” for activating one of the above two scenarios; your company’s timing for when to activate either plan will depend on your cash (how long you can wait before activating a plan), your customers (how they are reacting to the change), and whether there is an opportunity to quickly shift your product or service into a revenue opportunity created by the crisis. The immediate reaction, born out of the general panic and lack of experience with a crisis of this magnitude will be to “act quickly” and “cut deep,” but you’ll likely get a higher quality plan, and, perhaps more importantly, better alignment and trust with your team, remaining employees and your board, if you go through a more rigorous process before you act. This doesn’t mean months of delay, but weeks; the information will only get better.
2. Develop a Rebuilding Plan for a “V” Shaped Recovery: The so-called “V” shaped recovery is the hopeful scenario, the quick “bounce back” in which our economy comes roaring back better than ever. A CEO or board cannot responsibly plan for that scenario. Instead, channel your optimism into setting “triggers” — signals that markets are recovering and demand for your product or service is reemerging — to rehire and start spending on growth. It is much easier to rebuild than to run out of capital before the recovery.

Finally, you have to act. If you don’t, you’re not being the CEO you need to be. All your stakeholders are looking for you to step up and lead them through this crisis. It is going to be really hard. Whatever the outcome for your startup, you will be a stronger and more capable leader.

I plan on posting more on these dynamics in the coming days/ weeks. In the meantime, wishing all of you good health.

Feedback welcome at james@beriker.com; @jamesberiker