2020 > 2008 > 2001 — CoVID-19 — Adapt or Perish

#WaterBridgeVentures #CoVID-19 #Portfolio #Perspectives

Letter to our portfolio partners, founders — 20th March 2020

Dear Founders,

Let us start by acknowledging that this is an unprecedented situation. We hope you are taking adequate precautions such that you, your family and employees stay safe as the CoVID-19 pandemic assumes more serious proportions around the world. While we have had discussions with you over the past few weeks and talked about changes in your market approach, human resources, and financial plan to tackle the upcoming difficult period, we strongly believe that over-preparedness trumps inaction in the scheme of possible scenarios we are staring at. To say the least, we encourage you to prepare for turbulent times, plan for the worst-case scenarios and look at adjacent opportunities that this situation might bring to you and your business.

Before we share our thoughts, if there were handpicked partners or a Star-team to navigate businesses in these times, you would be on top of that list. Your passion, resolve to solve problems with an innovative approach, and willingness to make this world better is unparalleled, and we are proud partners with you in this journey.

You are aware of the exponential growth potential of CoVID-19 and also the significant benefit of helping curtail this in a timely manner if communities and societies come together. Government response has also varied significantly if one observes how governments of China, South Korea and Italy are responding to this crisis. Countries like India and USA have just started dealing with this and the next 2–4 weeks would define the depth of the impact on their socio-economic fabric. Populous countries like India that don’t have the resources, health care infrastructure to deal with this in a manner that Singapore or South Korea have, are especially susceptible to large scale and prolonged damage. So far, we are optimistic seeing the response of the Indian government and society in acknowledging the seriousness of this problem. Our fingers are crossed though and we are closely watching how long and deep this hits our country and specifically your and our business.

At WaterBridge Ventures (WBV), we believe that this is a unique situation that none of us have seen in our lifetimes. CoVID-19 is a global problem that is causing disruptions in customer sentiment, business activity, supply chains, employee productivity and availability of financial resources, especially to small and medium sized enterprises. If it gives you any comfort, we have seen first-hand the 2008 global financial crisis and the 2001 recession which affected startups severely. On both those occasions, financial markets and consumer sentiment came back with a vengeance (within 12–24 months), and not only did the surviving businesses become stronger, a lot of new opportunities got created for innovative founders and companies. We have also witnessed how the financial world and business activity can come crawling to its knees when a pandemic like SARS hit parts of Asia in 2002. Unfortunately, CoVID-19 is not as contained as SARS was, and current state of financial markets suggests that we could be staring into a prolonged recession akin to 2008. While it is early days, it does seem like a double whammy. Like in our investment calls, we are wrong a lot of times (and hope we are about the depth of this financial crisis), but we can’t emphasize enough the gravity of this situation.

What does it mean for you? It is not one size fits all. Some of you are seeing massive drops in customer engagement and revenue especially if your customers consume services/products in the offline world. Some of you are seeing the opposite effect where customers that are working from home (WFH) or undergoing social distancing have more time to consume your offerings. Given WBV has a diversified portfolio, we can see a spectrum of impact. While on one hand online education, gaming and content companies are seeing a splurge of new users and engagement, on the other hand businesses that depend on customers visiting local centers or anything to do with risk of infection (viz. restaurants, hotels, public mobility) are seeing a drop in consumers, engagement as well as associated revenue. None of the companies we know can claim that they are isolated from the effects of CoVID-19, one way or another. All of you have seen disruption in supply chains and have had to deal with WFH paradigms with your employees and partners already. Those are completely new paradigms.

To get a better grip on this, we urge you to take this opportunity to reflect on the fundamental problem you are solving and why your customers want to come back to you. Here are also some additional pointers from us:

Revenue assumptions won’t hold true

You are going to see massive shifts in your revenue profile

For those that are yet to achieve PMF, this could apply to your most important user engagement metric. Our advice is that you think hard about massive change in customer sentiment (consumer or enterprise). For B2C companies, consumers are going to see an eroding confidence in the economy and incomes would go down as more employers start to struggle. In such times, discretionary items take a massive hit. Similarly, enterprises are not necessarily going to pilot or pay for new software (B2B) unless it solves for an immediate revenue, cost or productivity gain. Financial services companies would see significant corrections in their credit quality, hence it makes sense to not take new lending risk while optimizing for existing portfolio. On the other hand, online education, telemedicine/e-health, gaming, internet infrastructure, and content companies will see new use cases for revenue and engagement. The best way to navigate all this uncertainty is to challenge all your key revenue assumptions, stress-test them for a prolonged consumer spending slowdown, as well as capitalize on adjacent opportunities. Companies like PayPal (2001 crash) and PayTm (2016 Demonitization) created adjacent opportunities in times of crisis while Google, AirBnB type of companies strengthened their PMF in down times.

Cost structure and associated burn could leave you high and dry

This is a great time to reflect on where your organization is bloated and to cut the flab

Thinking about new role allocations, organisation structure and productivity gains with a design thinking approach would be the most sensible thing to do in this environment. Involve your key management team in these discussions and make them a part of this solution framing. While we would encourage you to be humane about your headcount rationalizations (especially with lower cost, service level employees), this is a golden opportunity to reassess the org. Fixed costs are like a hanging sword on a startup’s head and this is an opportune time to think about those creatively whether it is to do with headcount, rentals and licenses. With this mindset, you will find that decisions you may not have taken in a ‘growth only oriented’ environment will start to make sense in a ‘work more with less’ mindset. With a combination of new revenue assumptions and cost structure, you will be able to get a better handle on your capital allocations and burn.

Cash is King

If there is one fundamental truth in these times, it is the cash runaway you have.

If you think you have cash for 12 months, the reality is probably closer to 6 months. Challenging your revenue and cost assumptions will definitely increase your cash runway but if you are like 95% of startups dependent on external funding, the most important aspect is your fund-raise ability in this environment. Just like 2001 or 2008, the tap for new investments is likely to dry up sooner than you think. Current environment may not be representative of this since private markets lag public market by several quarters (30–40% stock market corrections are already seen across the world). Be creative, like, (i) Extend the previous round of funding if there is a set of interested investors from the last round, (ii) Explore bridge rounds with existing and new investors (debt, venture debt are also options aside from equity), (iii) If you are in the middle of a fund-raise cycle, take capital with a long term view i.e. size of the round and valuations that you wouldn’t have accepted earlier may be fine in this environment. The biggest difference between Flipkart and Snapdeal (and respective success) was their ability to raise cash ahead of any downturn, market share battles. We suggest at-least 15 months runway in a stress-tested business plan scenario.

Live to Fight another day

Adjusting your growth mindset to a survival mindset is a prudent thing to do but it is easier said than done

We know because we have been there. The tradeoff is between inaction (you continue to gain market share, grow vis-à-vis your peers but at the risk of running out of cash, new funding) and over-reaction (could live to fight another day at the risk of losing few months of momentum). Our advice is to choose the latter right now. If not decisively, at-least iterate frequently by looking at customer gains vs. losses and engagement metrics while avoiding confirmation bias. Come back to the drawing board every week. Talk to your customers more and you would get the gist. Times like these also allow for focusing on product upgrades, pivots and product extensions which seem like luxury in times of growth.

This is a great time to be hungry and creative but listen to your customers and investors more than ever at this time, especially if you have not seen economic downcycles before.

You will not regret cutting deep because you can recover from some lost speed, but not from losing breath in the middle of a marathon.

Thankfully we have partnered with you i.e. the best league of entrepreneurs building fundamentally strong businesses. Many of you have full-stack solutions and/or solid unit economics which would help a lot in the current context. We have full faith and confidence in your abilities to weather this turbulence. Be assured that you will emerge stronger at the other end of the tunnel but if we were suggesting picking some of your best traits, we would bet on being creative, reflective and adaptive.

Our Best,

WBV Team