We’re in uncertain times as everyone across the globe adjusts to business as usual being a distant thought. It’s no surprise that the COVID-19 pandemic is having an economic impact on everything from small family-owned businesses to large global corporations. There has been much discussion on the impact of today’s new reality to travel, hospitality and healthcare. But what does this mean for startups? According to the Canadian Centre for Occupational Health and Safety, a pandemic’s total duration is likely 12 to 18 months, so businesses should plan accordingly.
Startup founders raising money are starting to worry, and for good reason. It will get worse before it will get better. Startups with at least one year in runway will see less impact if normal business resumes sometime this summer; however, those with less than six months’ runway need to get creative with their virtual fundraising efforts. It is important for companies to run lean and focus on the most essential activities needed to reach the next adjusted milestone.
What steps can startups take to weather the storm? Below are a few tips:
Now is the time for startups to reconsider their financial spending and needs. What is the conversion on sales with that marketing campaign? What is your sales productivity? How much cash do you have in the bank, and how long will that last based on the current burn rate? Companies need to determine the most essential expenditures required to reach minimum milestones during this environment. The economic environment is very uncertain, so startups should not be watching for a stock market recovery as an indicator that the broader economy will get back to normal.
It might be possible to maintain your current workforce, but perhaps you need to stop hiring and ask current team members to take up other responsibilities. The management team should outline what are necessary needs and what are commodity needs. Focus on the necessary needs, and limit the commodity needs to extend your runway. For example, many software tools have valuable features to help a team with its work, yet they are often not deemed necessary expenditures. There are several free tools on the market today from companies such as HubSpot and Google that accomplish many of the same core functions as other more expensive solutions. Focus on the company’s readjusted milestones, and have a lean operation to provide as much time as possible to reach them.
Now is also the time to talk with your investors, customers and employees to adjust expectations. In the past, current investors and potential investors may have indicated a particular revenue milestone you need to reach for the next round of equity financing. Have a discussion with them, and brainstorm what is realistic given the new macroeconomic environment. If these investors cannot budge on the milestones, then find a way to extend your runway with a convertible note to give your team more time to reach those milestones. If you cannot extend your runway, many investors are likely to understand and provide a new target to go after.
It’s also good to spend extra time checking in with your customers. They may be considering how to cut costs, and you want to avoid being reduced or eliminated as a vendor. Listen to the problems they are facing because there might be a way to help during this difficult time.
Last but not least, reset expectations with your team. Individuals may be concerned about their job status and need direction from their leadership team. It’s important to convey that the company will be going into lean mode, while also emphasizing how you will do everything possible to keep the entire team intact — and that you need employees to take on more responsibilities. Overcommunicating with all of your stakeholders will be very important as you navigate a difficult environment.
Startups will need to adjust their fundraising plans based on the new economic reality. If a startup doesn’t include an adjusted plan and cannot explain how it will take the new business environment into account, then investors will have an increasingly difficult time getting approval from their investment committee to finance that company. Many investors should still be able to participate in your financing round unless their limited partner base faces major difficulties. Show them you are not only aware of the environment, but also have a plan to navigate it and succeed. This plan should outline how you are going to market during the projected difficult next year or so, followed by how you will scale as the economy starts to recover. It will also be important to show how you expect to grow your headcount and manage cash during these times compared to how you will expand as the economy recovers. Thoughtfulness and detailed usage of funds are particularly important as you look to fundraise today.
These are just a few of the steps startups can take as they, and all of us, navigate this difficult time together.