Over the last week, I have been in discussions with many founders figuring out how we should prepare for the changing environment. In this article, I share some findings that may be useful to other founders as well.
Understand the Impact on Your Business
First and foremost, it is crucial to understand the impact of the situation on your business. As most of the businesses are in the same situation as you, i.e. figuring out the way forward, the potential clients do not have resources to focus on new projects. Also, as we have learned from the previous turmoils, during times of uncertainty, the potential clients are unlikely to engage significant chances. Thus, these elements are likely to decrease new sales.
Your business will be impacted, monitor the signals, act promptly
Keeping a keen eye on sales and use metrics helps you to see early signals of how your clients are reacting to the situations. This enables you to respond promptly.
Also, it should be kept in mind that changes in markets also mean that new opportunities may arise. You might be able to spot these opportunities by yourself, but keeping in touch with your clients and solving their new issues may give your insights on these opportunities arising.
Understand the Impact on the Funding Markets
No matter how long the pandemic will continue, the funding markets are already affected. In the equity markets this means in a nutshell that the investors will become more conservative:
The angels and family offices make fewer investments. Also, their principal focus will be on ensuring the success/survival of their existing portfolio companies, so the investment focus will be on follow-on investments, not new ones.
The VCs will continue investing, however, for those VCs who already have a significant amount of portfolio companies, the primary focus will be, as with the angels and family offices, in the existing portfolio companies. The VCs that have closed their funding rounds recently have resources to invest and are making new investments as well.
As there is less money on the markets, investors will have more opportunities locally as well. From the Finnish point of view, this means a reduction in international VC activity.
All in all, these changes will reduce the capital available in the market. Therefore, it is important to ensure sufficient runway to push through the turmoil.
Protect Your Cash
As stated above, the equity markets are in turmoil and you do not want to be fundraising during this time. For one, if it succeeds it will most likely be expensive (i.e. the valuations will be lower than before); and for two, it will most likely not succeed. Thus, protecting your cash and ensuring sufficient runway, or even better: positive cash flow, is important.
To improve the cash flow situation, it is good to go back to the impact on business and review the expenses accordingly: Which costs are critical, which are beneficial (i.e. nice-to-have) and which are useless?
If the customers are not buying, it makes very little sense to pour money in sales and marketing. Rolling out a product version n+1 would be nice to have, but postponing the R&D expenses might make more sense.
Different countries are also rolling out different financial support packages to respond to the situation. Finding out about these alternatives and applying them may give you additional cash and help you with your runway. As of the date of this article, the following solutions are available in Finland:
Postponing pension payments by three months (more information on your pension company)
Most of the banks are offering to postpone the paybacks of your loans up to six months
Eased payment arrangements by the tax authorities (for the companies that cannot make the payments
Take Care of Yourself - The Storm Will Pass
Finally, take care of yourself and people around you. The situation is difficult, but at some point, the storm will pass. Acting promptly helps you to get to that point. Protecting your cash will be important and it is better to have too long runway than a too-short one.
We have yet to hear about a startup that failed in a downturn due to too high cash reserves
(Edited 1.4.2020: Added ELY Center funding to the list of financial support options.)