How to prepare your business to an inevitable economic slowdown
In times of a general uncertainty caused by COVID-19, economic slowdown seems inevitable. Global recession may take several years, and startup founders cannot afford to remain passive. Remember, that not only your company is facing this challenge. The same applies to your competitors, suppliers and customers, which also means opportunity. Whether your company emerged victorious from the slowdown depends on how quickly you verify your business plans, budgets, business models and introduce preventive actions.
Here are some advices we might give you remembering prior crisis in 2002 and 2008. We are aware we could learn from you as well. At the end of the day — you are The Founder and we are not, however, some of us — used to be, which make us a sparring partner to discuss challenges you might face.
1. Safety first!
Take care of your team and safe working conditions. If we want to overcome pandemic and halt the spread of the virus, cancelling all business trips and in-person meetings is essential. Be reasonable! In the age of digitization, switching to remote work should be a relatively simple solution and certainly a socially responsible decision. We understand that home office for parents, especially with young children, is a big challenge, however, this is a time when we all must be flexible and empathetic. Introduction of flexible working hours will allow your employees to accommodate a schedule around childcare.
2. Be proactive
You are not alone. Organize a brain-storming session (remotely) with different stakeholders to discuss the situation and look for ideas to cut your costs, increase your sales or introduce new products/services. Different point of views are often vital to start thinking outside the box.
Take care of maintaining good and transparent relationships with clients. Organize frequent calls with them to understand a possible impact of the solutions you implement. Try to understand whether their needs have changed during the crisis. Consider selling packages, long-term contracts with some rebates. It’s wise to tie your clients with you. Keep in mind that difficult situation has also affected their businesses, so be flexible. Extending your payment deadlines or spreading payments into instalments can reduce churn and will further strengthen your customer relationship. Small payments are better than no payments.
It is the end of the business we know at least for some time. Coronavirus will change our work, travel and shopping habits. Invest in reliable virtual communication tools and test remote sales. It could work better than you might expect now, even if you did not sell that way earlier. Your clients and potential investors will understand your motives for giving up travel and personal contacts in a foreseeable future.
If all the above actions do not bring results and your sales suffer, revise your past activities and shift sales and business development resources to making a better product. This may be the right time to take a step back and return to improving product which should give positive results in a future.
3. Reevaluate your business / Make a contingency plan
Now that you know that your business plan is no longer feasible and your forecasts and assumptions need to be adjusted, think about how long you expect the slowdown will last. It might be the case that it will hit your business heavily, so you should be prepared for at least 12–18 months of a slowdown. Prepare 3 scenarios of the budget (i.e. cash inflow -15%, -30%, -60% for the next 6–18 months). Analyze how the dropdown in sales will affect your business model. Prioritize costs with the highest and lowest impact on the bottom line and plan how and when to cut unnecessary costs which are not related to a revenue increase or simply might be non-essential for some time. At this point, determining your runway under current assumptions and under each of the financial scenarios is crucial. Conduct a stress test which allows you to determine the ability of your company to deal with an economic crisis.
As we say, ‘hope for the best, prepare for the worst’. We will probably have to face a prolonged crisis and a deep recession, which may cause the need to transform your business model. Consider whether you can customize your product or service as a solution that can help your clients and other companies outlast the crisis or mitigate its effects.
You may have to face a harsh decision and reduce employment. Prepare for it, talking to your managers first. Ask them to prepare lists of key employees inevitable for sustaining your business or do it yourself, depending on the size of the organization. Before that, however, consider salary freezes, temporary salary reductions in the founding team and reduction of work hours of other team members with the salary being reduced, respectively. We have seen it previously that in difficult times people are eager to agree on reduced salaries and not losing jobs. Lowering salaries is not taking the advantage on them — it’s being responsible for the company and the people you employ. What is more, monitor the situation in a country where your company is registered, because governments are introducing various public support programs to mitigate the effects of the crisis on business.
However, if you will be forced to let people go, prepare for it properly. There are many websites that will help you get through these difficult conversations. Well-communicated dismissal message will not undermine employee’s self-esteem and will allow you to remain on good terms. Be specific and very transparent about the current situation and the reason for their dismissal. Try to keep them close to your company if possible. The slowdown will end eventually, and you might want to re-employ them.
4. Fundraising
Economic slowdown will also affect VC funding climate. Restrictions and economic uncertainty will most probably reduce the number of VC deals and investors will be choosing investment targets much more selectively. Some VC firms might focus more on the current portfolio instead of looking for new investments.
Most probably the crisis will influence investment tickets and valuations. Having a leaner growth strategy will become more important for VCs when assessing your project. We remember how long the market recovered after the crises in 2002 and 2008. The problem is that at the time the collapse mainly concerned the stock market. Now the crisis will affect the entire market and all industries, so it is difficult to predict how soon the VC market will return to its old investment habits. Start planning your fundraising earlier than you have planned. Consider changing your plans in such a way, that will involve a winning strategy assuming longer-term crisis scenario as well. Having a plan for reaching our break-even earlier, also might help with some cases. Think also about an alternative source of funding in case you fail to get financing from new or current investors. Usually, clients are the best source of financing. ;)
Finally, every company is different, so there is no one-size-fits-all solution. However, we hope that at least some of the above solutions will help your company turn this difficult time into your favor.
Key takeaways:
- Try to look for alternative sources of revenues. Don’t be afraid to redefine your business model.
- Cut unnecessary costs. Prepare 3 budget scenarios depending on how hard the crisis will hit your company.
- Firstly, try to cut salaries, not firing people. If you will be forced to fire people — be gentle and empathetic.
- Be transparent about company’s situation to your employees and investors.
- Prepare to receive lower tickets and valuations from some VCs.
In any case, you have some comments or would like to discuss specific details in your marketplace startup, we are always available to discuss it with you and share our experiences. Please write me at my e-mail: elzbieta.obrebowska@moc.vc
