Entrepreneurs are no strangers to the challenges of getting a business off the ground. Still, the coronavirus (COVID-19) pandemic presents an extreme – even, existential – challenge. As the situation continues to evolve, many startup companies face a very uncertain future.
Even with enactment of the massive $2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES Act) on March 27, prospects for securing investor funding for your startup remain bleak in the next six to 12 months. Yes, most banks, as well as venture capital firms and angel investors, currently have funds to invest. However, given COVID-19-related shutdown conditions in many industries, work-from-home mandates and the precipitous market drop, cash hoarding is the new norm, and until market conditions tangibly mellow, funding challenges will be formidable.
What to do? There are five steps you can and should take now to help your company navigate the crisis:
- CONTROL YOUR CASH BURN RATE. If you’ve established a plan to raise money in Q3 or Q4 of 2020 and now those funds appear to possibly be out of reach, you may need to make your current nest egg last for an additional 12 months—possibly even longer. Starting now, take a hard look at your budget and determine what expenses you can eliminate. Additionally, take stock of revenue and/or cash that you were expecting to generate and clarify, in your own mind, how possibly not having these resources will impact your bottom line and cash burn under present-day circumstances. If the COVID-19 crisis touches your business directly (a likely scenario), then sales will be impacted, so you’ll need to discount those back – probably drastically at first – then adjust those figures as you move through the remainder of 2020.
- DIG DEEPER TO REMOVE ADDITIONAL EXPENDITURES. Review all non-essential expenditures in your business – e.g., trade shows that no longer exist; employee bonuses; off-site team meetings; entertainment, meals and/or travel – and think seriously about pulling those out of your budget. By removing those costs from your projections, you can better understand the associated impact to your bottom line and your total cash position. As a result, you’ll start to see if you’re positioned to weather the storm.
- GATHER CUSTOMER INTELLIGENCE, THEN REVISE SALES FORECASTS AS NEEDED BASED ON YOUR CONCLUSIONS. Take an outward view of your customer base to get a real sense of where your business stands. Are you a component of your customers’ cost of goods sold, or are you part of their operating expense line? If you represent a primary cost for them to sell their product, then knowing how they are being impacted by the coronavirus crisis helps you understand its impact on your business. Reach out and talk to them. What’s affecting them in this current environment? How is their ability to spend dollars being impacted? What are their customers saying to them? Is there a creative solution in payment terms or pricing to keep them buying at this time? With intelligence in hand, you can reexamine your revenue/sales forecast to determine the realistic impact of the coronavirus crisis on your cash position—and ultimately, devise a contingency plan to hoard your cash and spend less.
- EXPLORE OPPORTUNITIES TO DEFER EXPENDITURES. Reach out to landlords, banks, software-as-a-service (SaaS) providers and other entities on your accounts payable ledger and request opportunities to defer payment on associated expenditures. Chances are good that these entities don’t want you to completely walk away from their business, service or physical space, so they may be open to alternative arrangements that help you stretch your dollar. In the current COVID-19 environment, every dollar counts, so treat yours accordingly.
- LEVERAGE LENDING SERVICES IF NEEDED TO MAKE ENDS MEET UNTIL YOUR NEXT FUNDING ROUND. Unfortunately, some startup companies were overleveraged heading into the current crisis, so they could be compelled to lay off employees or seek alternative financing options to keep the ship afloat. There are dozens of lending services available that focus on startups. Do some research, and ideally, consult with experts in the field, to determine whether your startup could benefit from leveraging one, and what the costs would be in the short- and long-term.
Finally, if your startup/emerging company is in the pre-revenue stage, remember this: While investor funding may not be available in the near term, you should take an opportunistic approach to control your burn so that your growth prospects are delayed, not decimated. You still have an opportunity to make your startup a reality; you just need to revise your timeline accordingly.
Thankfully, history strongly suggests that this current crisis is more akin to the post-9/11 market environment than the post-2008 market environment. Why? Primarily because banks aren’t at the epicenter of the crisis; they’re not the cause of problems we face today, and generally speaking, their cash position is strong. They’re not over their skis, and they’re not over-leveraged. When recovery begins – and it eventually will – they have the capital necessary to invest back into the markets and finance debt. So, instead of a five-year healing period like we saw after the 2008 crisis, we hopefully face a more manageable 12-18-month recovery period.
Do you have questions about navigating the COVID-19 crisis, or other emerging company issues? Please contact Richard Bartolanzo or Brian Hamm by calling 770.396.2200.