Now is the time to act
Below is part of a memo we sent out to our portfolio companies for Proof of Capital. Sharing it publicly here for the benefit of other entrepreneurs and founders in the technology sector:
On March 12th, 2020 the stock market fell 10%, suffering its worst day since the Black Monday crash of 1987. In the first few months of 2020 the market has almost lost all of its gains across all of 2019.
When I first moved to Silicon Valley in 2008, the world was in the depths of the global financial crisis. Housing prices were at an all time low, downtown Palo Alto was half empty, uncertainty was rampant, and the top venture capital funds were telling entrepreneurs RIP the good times are over.
Amidst all of this volatility in 2008 the arc of technology continued, founders persevered. And despite the collapse of all assets, a few of the most valuable early stage companies were forged during this time period including: Lyft, Credit Karma, Twilio, Slack, Dropbox, etc.
Now is the time to act
The black swan event of the decade is already upon us, COVID-19 or more commonly referred to as the coronavirus. This post isn’t a recap of what happened, it’s about what to do next, especially for founders & CEO’s of startup companies.
As with all major shifts in the environment, this one will offer opportunities as well as risks. While we predict this downturn may be shallower than the 2008 financial crisis, it could potentially progress on a much lengthier timescale.
With more and more countries closing off their borders and consumers pausing economic activity - this will have massive downwards pressure on spending across the board. As a founder, now is the time to make decisive actions for the future of your company & employees.
Below I will cover:
Why now is the time to act
Tactical tips CEO’s can do now
My viewpoints on the effects across various industries
Final Thoughts
Why now is the time to act
Unlike the 2008 financial crisis caused by an overleveraged housing market, this crisis is due to a global pandemic, the COVID-19 virus.
We cannot inflate ourselves out of this problem, cutting interest rates to 0% will not help, stimulus will not work, and there are no easy quick fixes. This is a global health problem, that is causing an economic problem. The best thing to do to solve the underlying problem is containment. We need to shut down all face-to-face interactions and in-person activities to slow the spread of the virus, in which the consequences of this will wreak havoc on the economy.
China is the closest comparable to fully understand how long this could affect the US economy. China had its first case of the coronavirus in November 2019 and is only now coming back to normality in March 2020 (5 months later).
For the United States, if we take the necessary measures I predict we will start reactivating back to normal business activity around Q4 of 2020. Until then expect a challenging Q2 and Q3.
Data is from the Johns Hopkins University Center for Systems Science and Engineering (JHU CSSE)
(Note: There is limited data from the first reported case in China until today. Above is an approximation based on the R0 value as observed)
On top of this, I also predict that this crisis will lead towards more longer term structural trends and changes in consumer behavior & workplace behavior. A few examples: work will increasingly become more remote, eSports and gaming will grow even more in demand, financial services will turn radically more digital, etc.
This will be a defining event for consumers and businesses around the globe, and we should expect real long term changes as a consequence of this event.
Tactical Tips CEO’s Can Do Now
Below are a few practical tips you can start doing now from a strategic standpoint and company operational standpoint:
Overall Company Strategy
Create company wide COVID-19 taskforce and plan. See examples from:
Be sure to communicate your plan open and honestly to all of your team members and investors.
Work from home is now a necessity
Make sure your company has clear processes for working from home, that is delivered to all team members including full time employees, part time, interns, contractors, etc.
Here are some practical tips on working from home from WorkBoard
People
Taking care of your team and having clear communication about your plan is of utmost importance.
Make sure all managers can clearly communicate work from home policy, sick leave policy, and vacation policy to all team members.
This includes all of your team members including part time employees, temporary staff, interns, and contract employees.
Here is an example of a company’s (Handshake) internal communication about their changes to internal policy for employees.
For parents working at home with seniors and children present, be sure to be flexible and understanding.
If you need to make hard decisions regarding your team, make sure to handle them directly and clearly with every person individually.
Finance
Cash is the most important resource for you to manage - The most impactful thing CEO’s can do now is to cut your company’s net burn rate (the dollar amount your startup spends per month, in excess of revenue). A few benchmarks:
Early Stage Companies - Should keep monthly burn at $50K or lower
Pre-Product Market Fit - Should keep monthly burn at $100K or lower
Post-Product Market Fit - Should keep monthly burn at $20K per month per team member (fully burdened) or lower.
Review all expenses - Cut out any unnecessary expenses, downsize to a smaller office, renegotiate long term leases, review all software expenses, etc. Act now and focus on the things that matter.
Monitor Runway - Ideally CEO’s should strive to have 18 months or more of runway. (Total cash on hand / monthly net burn rate = Months of runway left). If you have less than 6 months of runway you need to seriously consider a fundraise or bridge round now.
Analyze and adjust revenue goals - Consumer and business spending will likely slow substantially across the board, so now is the time to analyze your short and long term revenue goals and customer pipeline (see “Sales” section below).
Have a realistic fundraising plan
Start getting comfortable pitching via Zoom and video calls. Building rapport and trust is more difficult than doing so in-person but this will be the new reality for a while.
Be prepared for the fundraising process to take twice or three times as long. For example if you expected a 3 month fundraising, expect 6 months+ for now (this varies depends on your vertical).
Because of the increase in length, ask all potential investors if it's ok to add them on your company update. The best thing to do is to show investors how you weather the storm.
Update your existing investors and ask for help. Clearly communicate your adjusted quarterly and yearly revenue goals, customers, pipeline, burn rate, and other company metrics.
Be prepared for a decrease in valuations. The reality is many companies will potentially need to do bridge rounds to get them through this period.
Product/Engineering
CEO’s should have a frank conversation with head of product and engineering on the following:
Adjust product roadmap - Need to account for a decrease in productivity (working from home with kids, etc.), adjusting to new work environments, and rapidly put processes in place for the team to work remotely and get back to efficiencies quickly. You need to be realistic on what your team can achieve and be ready to extend timelines on initiatives.
Leave room for urgent features that need to be built. For example:
Marketing
Adjust marketing and advertising budget, based on lowered demand.
Analyze customer lifetime values (LTV) and adjust minimum return on investment (ROI’s) of advertising spend.
Review all upcoming marketing campaigns and adjust your overall marketing goals based on your updated revenue goals.
Sales
For B2B companies - establish remote selling tools for your salesforce.
Adjust customer and sales pipeline:
Current Customers
Revenue Concentration - Look at your revenue concentration across your top customers. Ideally no one customer should be more than ~5% of the total revenue.
Triaging customers - This slowdown will be unevenly distributed so you need to triage your customers into a few buckets:
Unaffected and strong industries - For the customers in strong industries (future of work, gaming, ecommerce) - try to move these customers to annual contracts and even consider sales expansion for the most positively affected customers.
Weak industries - For the customers in weak industries (travel, restaurants, luxury goods) you will need to heavily discount their revenue contribution. It might sound counterintuitive but the best strategy could be to give the hardest hit customers discounts or deferred payments to win their trust long term.
Startup customers - If your customer base is largely other startups, these customers tend to be hit the hardest during times of recession. I would expect a large portion of these customers will now renew customer contracts.
Customer Pipeline
Expect your time to close to increase substantially. A conservative estimate is it will now take 2x as long (ex. If your time to close was 3 months, expect 6 months now).
Expect average contract values (ACV) to decrease. You can use a similar triaging exercise as above to triage the customers within your pipeline.
Start adapting to the new realities of sales - digital selling, video calls (not in-person meetings), longer trials, more self service, etc.
Support
Customer care is job number one. This is the time where you earn long term customer loyalty, and when you ask your customer support and customer success team to step up, even if it means sacrificing some near term revenue.
Enable remote support communicate tools (with customers and between support team members)
Review customer escalation process. If your company serves customers in hard hit industries (travel, restaurants, etc.) you need to be able to process special accommodations. For example:
Grubhub is setting up relief efforts for independent restaurants and delivery partners.
Most major airlines are waiving all change fees and cancelation fees
Partnerships
Now is the time to focus on the partners who are with you for the long haul.
Adjust partnership roadmap and timeline. Be realistic on the value you will derive from your partners, because everyone will be dealing with their own internal channels first.
Encourage your business development team to find new partners that may want to band up to fight this downturn - aligning new interests.
My viewpoints on the effects across various industries
In addition to all of the actionable steps founders & CEO’s should take, here are my own personal viewpoints on how this downturn will affect various industries.
Consumer spending and business spending will likely slow, although we forecast this to be uneven across various industries and subsectors. This spreadsheet below can help you triage your customers and future second order effects.
Final Thoughts
In times like this it’s important to come together and take care of our entire communities: employees, families, partners, and society at large.
Make sure your family, relatives, and loved ones are prepared. Here are some resources from the CDC for home preparedness.
For team members with families and kids, be sure to have a lot of patience. Many schools will be canceled and working from home with kids is a real challenge.
Be sure to watch after your neighbors and greater community. There will be many people negatively impacted by this virus, and we will all need to come together and help each other out.
This includes helping neighbors pickup groceries, sharing necessity items, and being there for emotional support. It’s times like this where humanity needs to come together and be greater than just ourselves.
We’re all in this together. Be healthy and safe.