How founders can plan their finances in the coronavirus age

This is going to be a difficult time for many founders. This article is a guide to planning your finances in the coronavirus age.

How long will the coronavirus impact startups?

To plan your finances, you first need to consider how long this situation will last, since any financial plan will depend on that.

Unfortunately, there isn’t going to be a great answer to this from anyone— it’s impossible to predict the future. But our best-guess analysis is we’re expecting the rest of 2020 for a coronavirus recovery in the venture capital industry, and could be longer. The reason is:

• Consider the best-case scenario is if a cure/vaccine is found immediately
• It will likely take significant testing to ensure the cure/vaccine is safe
• This will be followed by weeks or months of production
• This will be followed by weeks or months of dispensing that cure (which the US healthcare system is not setup for efficiently)
• After that, there will likely be some time before culturally things truly return to normal (it won’t be immediate).

…and this is the best-case scenario where a cure/vaccine is immediately discovered.

So this situation is not (likely) to go-away immediately. How is a founder to plan around that?

Recommendation: Be conservative

We encourage you to plan for a conservative case scenario. You can always rebuild later if the market is better than you expect it to be. Having a few quarters of slower growth is well worth-it in-exchange for staying alive during this crisis.

Specific recommendations

• Realize that the coronavirus will affect you, even if its indirect — an overall industry slowdown affects all industries, since they’re correlated. Even if you think your business is in an industry that’s not directly impacted by the virus, you’ll still likely experience challenges. There will be higher unemployment, frozen budgets, and longer sales cycles.
• Fundraising from a new outside lead VC is likely to be tougher — We’re forecasting a supply/demand shift for new rounds that is unfavorable to entrepreneurs. VCs are going to generally keep more capital in-reserve to save their existing investments, and the bar will go-up for new investments. Due diligence will take longer, and fundraising cycles will elongate. There will be more competition from other startups for venture capital who can’t support themselves from their own revenue. Valuations are going to get slashed as a result.
• Cash is king — Start thinking about runway in units of years, not months. If you have less than 12 months of runway, then you’re in the danger zone. If you have more than 12 months, you’re still in a precarious situation. This may be a flat growth year for many startups (potentially negative growth if customers churn due to forces outside of your control). As a result, the expected-case for many startups will not be compelling-enough to secure additional financing.
• Throttle hiring based on results, not projections — Rather than having a hiring plan that’s tied to your future financial projections, only hire if you’re able to actually see (A) strong sales and (B) low churn. That is, hire based on retroactive triggered events, rather than forward-looking hopeful events. That will protect you from your own optimistic bias. This is important since the definition of an entrepreneur is an eternal optimist.
• Proactively cut burn — You generally want to be proactive (rather than reactive) about taking the necessary cost reduction steps. For many startups this will mean a hiring freeze as a first step. A more responsible step for many startups will be to proactively lay-off staff and cut expenses before it becomes a problem. This is tough on company culture. However, if you wait, it’s likely to get harder, not easier. The reason is you could be in a pack of other desperate startups fundraising simultaneously with low runway. You generally want to think about reducing burn before (not after) you’re low on runway.
• Focus on selling into verticals not impacted by the coronavirus — There will likely be budget freezes from impacted verticals (e.g. Travel) and growth ahead for other industries (e.g. E-Commerce). This should help keep sales cycles shorter and have a higher probability for closed deals. But note that this is not a silver bullet since your competition will also be selling into those verticals, which will result in increased competition.
• Ask customers to pre-pay for a discount — If you have a long-term contract with a customer, having them pre-pay can help reduce the dependency on venture capital. It’s well worth-it to offer a discount for this certainty.
• Offer professional services to your customers — Training, consulting, support can keep cashflow coming in a down-market. Yes, it’s not a scalable revenue channel and it’s lower-margin, but it helps buffer cash.
• Draw-down on venture debt early — If you have a debt line from a bank, there’s a possibility that you may not meet your covenants, and it’s also possible that your bank may try to wiggle-out of it due to solvency issues. Drawing down on venture debt earlier is a way to protect yourself from debt lines being pulled.
• Communicate often with your investors — Sending monthly updates to your investor base will be more important than ever. You want to have conversations with them where you decide together on the right steps to take. If you involve them in the process, that will help get you on the same page, which builds loyalty. Informing them of what steps and plans you’re taking is going to build trust and will give you a higher chance to secure additional financing (if needed).
• Don’t rely 100% on your existing VCs to bridge you — VCs have a finite pool of capital and are going to have to choose among their portfolio companies for bridge rounds. The weaker companies are going to have a tough time raising, even from existing investors, and we expect a number of them will not be saved.
• Get to profitability and control your own destiny — Depending on your situation, venture capital may not be a reliable source of funding on a going-forward basis. The most reliable solution is to build a real business, to stay alive, and get to profitability faster than expected.
• Your situation is unique — This blog post is general-purpose and not all the advice will apply to you. Your scenario will require specific and customized plan, and as CEO, your job is to make a decision after considering all viewpoints.
• Try to remain positive — even in a scenario that appears adversarial, a positive attitude can result in creative solutions to pull your company forward. Your team will be looking towards you for confidence and you can manufacture your own success.

If you’d like to talk more about your specific situation, email me at ed@hack-vc.com and we’ll chat off-the-record.

-Ed