These are strange times. The combination of events that are triggering crises across multiple sectors snowballing into each other is unprecedented. Most countries all over the planet are currently juggling a pandemic and an economic downturn, plus anything that was going on before that.
What is difficult about times like these is the sense of complete uncertainty about what comes next. Different people cope differently with uncertainty, but in business having a plan is often advisable if not necessary. Last summer, when our main worries were the US/China trade war and Brexit and the markets dropping 2.5% were still newsworthy, Bloomberg wrote that “markets crave all the certainty they can get“.
Investors don’t like risk, or better, they don’t like to take on more risk than what they’re paying for. This is why historical moments like this often result in radical shifts in the economy. However, keep in mind that crises can have benefits. The etymology of the word “crisis” is to do with the moment when a decision must be made.
We covered the steps that took us to this crisis separately. Here we’ll work out what are the most likely scenarios in the near future and what decisions you can make now in order to make the most of those future scenarios.
No one really knows what’s next, but here are some suggestions of what start-up Founders will experience in the short-to-medium term.
Once we realised how serious the situation was, we started advising our clients to try and close their Funding Rounds as soon as possible
Whether your business is directly affected or not, in fact, the only safe prediction is that investors will become more cautious with their money, given the current economy.
Public markets falling usually result in lowered valuation multiples, meaning that you are not likely to get the same deal as if you had raised funding before the crisis. Travel restrictions will sometimes make it harder to meet and pitch to investors, which will inevitably slow down fundraising cycles.
Tomasz Tunguz compared the current market crash to the 2008 financial crisis, and plotted the dollars invested by Funding stage back then, in order to estimate how long a recovery will take.
Keep in mind that this was 12 years ago, when private venture capital was a fraction of the market it became in recent years. However, the data seems to show that while all sectors took a relatively similar fall in Q3 2018, Seed-Stage deals picked up pace shortly after and were the quickest to recover, while later stage deals took longer to reach pre-financial-crisis levels.
Depending on stage, sector and cash-flow, companies can expect at least 3-4 quarters of investors being reluctant to offer the same term sheets they got us used to in these last couple of years.
Sequoia’s memo states: “Even if you don’t see any direct or immediate exposure for your company, anticipate that your customers may revise their spending habits. Deals that seemed certain may not close. The key is to not be caught flat-footed.”
The key here is to keep in mind that all businesses can be affected by the domino effect triggered by the pandemic. Travel companies were the first to take the hit and as governments start to enforce lockdowns across countries, all physical retailers will suffer.
Whatever comes next will keep re-shaping (at a faster pace than ever before) how customers spend money on a daily basis. Strategists Sophia Sunwoo was recommending start-ups to differentiate their revenue streams already a month ago.
This is true both for B2C and B2B companies. Remote working, among others, will take a toll on companies as different as public transport and paper manufacturing.
On the other hand, with investor confidence down, high growth companies will have to find a way to readjust their spend in order not to burn through their runway before being able to secure a new round.
Cutting essential spend as early as possible is crucial at a time like this, as is reassessing growth plans in accordance with longer fundraising cycles.
As a result of sluggish sales and a lack of capital investment, growth won’t be as quick as Founders might have budgeted for. Uncertainty makes investors and customers equally wary of how they spend their money, and on both sides, it will take time to readjust.
In the meantime, companies that planned to hire, scale sales or expand internationally may have to rethink their plans.
Tomasz Tunguz makes a very interesting observation on how social distancing will have a direct impact on the way we sell products or services. This is because the ways in which we are used to communicate in business today are about to undergo a big change, from meetings that could have been emails to investor conferences that will have to be slides.
The silver lining is that, since the whole market will slow down, there’s not as much pressure to keep growth rates high to impress investors.
What you can do
A crisis is a moment that calls for crucial decisions, so what decisions can you make now to make sure your business lives – and even thrives – through this era of uncertainty?
1. Work for the best, plan for the worst
Things are going to change, one way or another. If you prepared a Financial Model that relied on assumptions that could be impacted by this emergency, there’s no time to waste before you adjust them and reevaluate your next steps.
Even though you don’t see any way your company could be affected right now, work on the most conservative forecast possible and budget for it. Keep that plan as an emergency measure to adopt if some of your KPIs see a sudden change.
We are going to steal one more quote from the Sequoia memo, which conveys the importance of being proactive rather than reactive at times like this:
Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”
2. Chase all open deals
This is true both on the investment and sales fronts.
A cash injection might be just what your business needs to not let this crisis bring it down and use this overall slowdown to outpace the market on the rebound, and with more than a few months ahead when it won’t be as easy to get funded, this is a great time to sign a term sheet.
If you are fundraising now, be ready to deliver your pitch remotely, if meetings are affected by travel restrictions. Additionally, make sure to include in your pitch a response plan to the emergency. Acknowledging that your business may be affected by the pandemic or by a bearish economic outlook will actually look good in the eyes of investors, showing that you are able to respond proactively to business threats.
On the other hand, keeping revenues stable can allow you to run your business while minimising expenses until the emergency is over. How you do that depends on what you are selling, but calling for your marketing and sales teams for a strong, proactive approach might be a good start. Seizing the opportunities created by changing communications channels will be crucial to reach more customers than competitors, faster, before these channels become too crowded.
Some of today’s leading companies were born out of recessions. Airbnb, PayPal, Microsoft and Apple, to name a few. When times, spending habits and economic paradigms change, there’s always a chance to thrive on those changes and come out on top.
The key is being proactive and making sure your business is flexible enough to be able to pivot quickly. This might mean rearranging your business model completely and switching from a product to a consultancy model, as a response to the decrease in retail. Otherwise, a marketing overhaul aimed at reaching customers in their home – the place where they will spend most of their time in the coming weeks – might be the solution for you. Even divesting and focusing on efficiency and margin in the coming months, to come out of the recession with an edge on your weakened competitors could prove a successful strategy.
The only thing that matters right now is that your response to this sudden change in the economic landscape is as sharp and bold as the change itself. If you try to chase the changing markets you’ll always lag behind, but if you look ahead and draw your path to anticipate the market, this could be a blessing in disguise for your business.