How to keep your business afloat in uncertain times: Conserve cash, plan survival

In normal times, venture capitalists will push the start-up founders they have invested in to go for growth. But these are abnormal times and the VCs are singing a different tune. They are telling their portfolio companies to conserve cash and do whatever it takes to ensure that the business survives without having to raise funds for at least 12-18 months.

The reading of the investors may vary, but the message is the same: it is going to be extremely tough for start-ups to raise fresh money for the foreseeable future, unless they are some outstanding ventures and their business opportunity appears so robust to attract investors even in the time of Covid-19. Even if the lockdown is lifted from mid-April, the investors don’t see the market improving for the next one year at the minimum.

“Everybody has been told that you have to assume that this year is going to be a write-off for most start-ups. Cash is going to be hard. Whatever money you have, make sure you can stretch it till June 30 of next year. Ideally even December 31 of next year. I don’t think it will be easy for companies to raise money,” says Sanjay Swamy, Managing Partner, Prime Venture Partners, an early-stage venture capital firm that invests in sectors such as fintech, SaaS, B2B and consumer.

Long-term plan needed

GV Ravishankar, Managing Director, Sequoia Capital India, makes a similar point. “We do see people receding from the market and that is what we are telling our companies. You should expect that and hence don’t plan with the assumption that capital is going to be available in six or 12 months. So, extend the runway for 18 months if not 24 months. If they can go all the way till March 2022, that is a good thing,” he says.

According to Sanjay, Covid-19 will deal a crippling blow for a third of the start-ups. Even in this, the companies that have the money may just be able to see the crisis through, while a lot of those without money will simply die. For about half the companies there will be a one-year setback, where three-six months of business is lost and it will take them a similar period to recover that revenue. “If a company in December of this year is doing the same revenue as February, that is a par situation. They should be proud of themselves,” says Sanjay.

Anand Lunia, Partner, India Quotient, a seed stage venture capital firm that bets on start-ups targeting the Indian consumers, says he is advising his portfolio companies to conserve cash for 12-18 months. At least 12 months and ideally, 18 months. He believes this is not just a coronavirus-related problem, but a much bigger one. “Our view is that this is a reasonably massive disaster, at least as big the one we had in the Lehman crisis, maybe as big as the one we had in the 9/11 crisis. Post 9/11 we had a slowdown for at least three years and in 2009, we had a slowdown for 18 months,” he says. “We are telling people,” says Anand, “they have to sit on the cash and anticipate the worst in the economy even if the coronavirus threat reduces and when things begin to normalise and the lockdown is removed, things aren’t going to be good.”

Anil Joshi, Founder and Managing Partner, Unicorn India Ventures, which invests at the seed and early in ventures with a tech focus, says their portfolio companies have been told not to expect any business for the next 6-12 months. If that is the situation, they need to think of running their ship for at least 12-18 months without being able to raise fresh money. “The objective was to have, not a business plan, but a survival plan,” says Anil.

Chandu Nair, an angel investor and member of The Chennai Angels, says start-ups should conserve cash, do what it takes to survive and see the crisis through, especially when no one knows how long the after-effects will be felt. The founders should use the lockdown to improve customer engagement. They should also see if they can work with their customers and get upfront payment – that is, get subscription for a year in advance, while increasing the validity to 15 months instead of 12 months.

If cash is King is the message that the investors have conveyed to their portfolio companies, they are also telling them to work on ways to ensure the business survives. While most founders are loath at this juncture to sack their employees, they realise that will become inevitable at a later date when all attempts to cut costs are not enough for the business to survive.

Some founders have come forward and said they are prepared to forego their salaries; others have offered to cut their salaries by as much as 60 per cent and reduce wages on a graded basis for other employees.

This is the time for founders and the senior leadership team to work on improving the business.

On other days, the entrepreneurs are running around with hardly any time to look back on their decisions. Now, with almost all of them working from home, it provides the opportunity to think of tweaking the product, improving the engineering, engaging with the customers differently.

Sanjay and Ravishankar say they are still open for business – they will actively look to invest in companies as and when an opportunity arises.

It may take longer now to take a decision, they say. Anand, however, feels it is not the time to invest and says that a portfolio company of his has been in talks with an investor since before the Covid-19 crisis began. Once the problem arose, the investor offered a 25 per cent lower valuation and this dropped by another 25 per cent in March. However, says Anand, he is still advising the company to go ahead and accept the offer. Anil too is not looking to invest, but may put in some money in companies as “survival capital” and not growth capital.

Digital drive

The investors feel the lockdown offers a good opportunity for some digital businesses – online learning, medical consultation, video conferencing.

The founders are anxious, nervous and not sure of what the future holds. Investors are telling them that this too shall pass; the stronger ones will survive and emerge winners. The founders, according to the investors, are helping out each other and trying their best to boost their staff morale.

Sequoia’s Ravishankar says a crisis is also the time for the founders to identify the next level of leadership – those who are volunteering to take up more tasks and offering to take a pay cut in the interests of the company are the ones who will be there for the long term. He recalls a saying to sum up the situation: “When the fishermen cannot go to sea, they repair nets.”

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