Nicolas Keravec, the Managing Director of Asia Pacific Internet Holding Group (a leading platform founded by Rocket Internet and Ooredoo supporting some of Asia’s top internet companies) and one of 300 mentors in the international German Accelerator network, shares his experiences and advice to help startups navigate through the current economic uncertainty due the widespread impact of the coronavirus (Covid-19). Here are his top five risk mitigation strategies for startups around the globe to consider:
In my previous role as a PricewaterhouseCoopers consultant for 12 years, I worked with companies across Asia as they went through substantial challenges during the 2008 global financial crisis. It is a tough situation company leaders and founders today must face again as the coronavirus outbreak creates economic disruptions and affects their operations and their business investment(s).
Over the past few weeks, I have been speaking with many startup ventures about their concerns on how to work through this uncertain economy and tackle the challenges ahead. Based on these conversations and past experience, I’ve identified five risk mitigation strategies to help startups manage the repercussions of the coronavirus pandemic:
Difficult times bring out the true character of leaders, so do your best to reinforce your leadership of the company. Plan for the worst, stay focused… Don’t forget your employees!
As this is a crossroads in your business, be ready to make hard and fast decisions. Use the time to reassess all your business matters from staffing to product development and plan them according to priority and in light of keeping your operational expenses as low as possible.
One immediate question amongst startup founders is how to remain financially stable and keep the company afloat. In the context of economic uncertainty and disrupted sales, cash is the most important asset in your balance sheet. Over the next few weeks, assess your cash runway with multiple scenarios. Plan for a base scenario for the economy to recover in the next 3 to 6 months and in the worst-case scenario of up to 12 months.
Ensure that you are able to manage your receivables and payables by reviewing your working capital, aging balance and customer cycle. If your business model is not based on upfront payment cycle, this is an opportunity for you to re-evaluate your business model and maximize up-front payments.
Check your payment cycles and find a way to collect your receivables as timely as possible. In Asia for example, where customers are accustomed to paying in 30/60/90-day installments, late payments often become an issue so you should introduce tactics to have customers pay for a portion upfront. Think about offering discounts to your customers to encourage them to pay upfront instead of waiting for payment in long cycles.
In countries such as the Philippines where cheque payment is common, plan for alternative payment methods to receive cash upfront so as to tackle unexpected emergency situations like the recent country lockdown caused by the coronavirus impact.
Amid the coronavirus gloom, look out for opportunities. Everyone is open for discussion or renegotiation in these difficult times. Don’t assume a contract is final since businesses and providers are all looking out for better cash flow and new deals.
Stay ahead of the curve and keep yourself updated on government grants and incentives. Now is the time for you to take advantage of any opportunities or flexibilities provided by the government(s).
As you are looking at all possible ways to lower your business spending, review your third party contracts. Look to lower your variable costs such as supplies or service providers to reduce overall operational expenses. Check office spaces as they become cheaper with fewer companies that can afford it, to reduce rent costs.
I won’t sugarcoat this – it is crucial that during this uncertain period companies have contingency plans to survive the recession before sales figures drop. There is no time to wait. What if in the worst-case scenario, you lose your major customers or if they delay payments, will your company be lean and agile enough to address new customer cycles quickly? What is your back-up plan?
Having a contingency plan and preparing for stress-case scenarios helps put in place implementation strategies to manage any sudden losses when it happens.
As entrepreneurs, there is a tendency to be overly optimistic and overestimate what can be achieved. Now is the time to re-evaluate investments in new products or markets. Consider putting on hold investments in new products or new market opportunities to focus on the more mature and profitable ones. This way you can focus on spending money efficiently on growth.
We are seeing changing circumstances pave the way for new business models and certain industries to thrive. With organizations worldwide rolling out mandatory work from home notices, video conferencing, online collaboration tools, and bandwidth requirements on international circuits are increasing. Depending on what your company does and whether your business allows for it, it might be an opportune time to refocus some of your activities from your core business and pivot to this new window opening and position your product accordingly.
Another key advice I would reiterate to startups is to avoid cutting expenses on sales and marketing across the board without considering how this will impact your existing customer relationships and brand value. Of course, your sales and marketing costs would need to align with your revenue stream and stay consistent with customer acquisition cost (CAC), but especially in these difficult times, I would say that it is even more important for your company to shine on product delivery and marketing.
At this stage, your company may not be able to expand into new customer markets so focus on delivering the best for your core customers and not losing them. Maintain close communications with your existing customers and provide assurance to your customers that you are here to help them by delivering the best service. This will continue to give the brand loyalty and credibility your company needs in challenging times, and create a positive perception for existing stakeholders and future customers.
When it comes to external communications, communicating and engaging with your stakeholders (VCs, third party investors, etc.) is very important as they may not be aware of what is happening to your company on a daily basis. Continue to schedule regular shareholder meetings or calls and communicate your forecast for the next 6 to 9 months. Share the necessary actions you are taking to keep the situation under control. Here I would like to emphasize again to reinforce your leadership and steer the company forward.
For startups in the process of fundraising, it will be challenging but this is not the time to stop investor relations and communications. You should reinforce your communications with existing and potential investors. They would appreciate that you are reaching out to them and explaining what you are doing to tackle the situation. With clear and adequate communications, you will be able to rise from tough times to build a strong, trusting relationship with your shareholder board and potential investors.
Be ready to give more equity and raise less money per round compared to a few months ago as investors are risk-averse in this uncertain economy. They will most likely choose to invest in startups that are more proven or the ones operating in profit as well as seasoned entrepreneurs. Be flexible and lower your expectations when it comes to valuation, and consider other avenues such as convertible loans or short-term financing.
Have a credible story and forecast during your pitch, not only based on blue sky projections as that will not pass. Transparency is key – be upfront with your shareholders as they don’t like surprises such as emergency bailouts or last-minute notices about a short cash runway.
One question raised by a startup is how much time they should try to add to its next funding round, for example, if it was planned for 12 months, do they extend to 18 or 24? It is always better to plan for the worst, if it does not happen you have a buffer, if it happens then you have a contingency plan. The economic situation is going to stay very complex in the next 3 to 6 months and we won’t recover right away.
It will take time for investors to have confidence in the market and then another 6 months to close fundraising in general. We are already up to 18 months in the time frame without being too conservative so I would say 24 months if you can make it and that will give you flexibility if the market recovers sooner.
Lastly, while I have emphasized communicating closely with stakeholders and customers, don’t forget about your employees as there is bound to be feelings of anxiety and stress amongst them. Set aside time to ensure their questions and concerns are being addressed, they are after all the driving force behind any company. The earlier you communicate with them on your company’s forecast and plans ahead, the faster they can align with the strategy and work better internally and with customers.
Make it your priority to review and improve your cash position based on the considerations I have shared and don’t rely solely on receivables. If your cash position is stable and you have been fundraising steadily, there will be opportunities to acquire less prepared competitors or their assets or technologies. These are challenging times ahead, but my key advice is to communicate closely with all stakeholders, stay opportunistic and always look at it from a possibility to expand your brand and business.
Nicolas Keravec is a venture capitalist, tech entrepreneur, and finance business leader with 15 years of cross border experience with a deep understanding of tech-driven scalable business models. He is MD of Asia Pacific Holding Internet Group (APACIG), an investment vehicle and joint venture between Rocket Internet and Ooredoo. He has experience in driving Fundraising, IPO, Fund Management, risk management, External Reporting and Treasury in large to medium-size corporations & funds. He is based in Singapore and is one of the 300 mentors in the international German Accelerator network.