COVID-19 has had an immediate impact on industries that cluster people: all types of travel, the hospitality industry, sporting events, movies, restaurants and schools. Large companies are telling employees to work from home, and large retail chains are shutting down their stores.
The ripple and feedback of all of these closures will have a major impact on our economy, so if you are leading any startup or small business, you have to be asking yourself, “What is Plan B? And what is in my lifeboat?” Here are a few thoughts about operating in uncertainty.
This is pretty obvious. If you do not survive, there is no upside. So all of the strategies below are about survival. It is time to put aside the wonderful plans to become a huge company with world-beating products. None of these matters if you don’t survive.
Cash is king
Startups don’t generally die for a lack of ideas. They die because they run out of cash. Put in place a plan to conserve cash. Early action will be much more impactful than later action. Have at least 12 months of cash on hand, because that is likely what you will need. Even if the COVID-19 crisis resolves itself much sooner than that, the turmoil left in its wake will persist, particularly for startups.
Revenue is likely to be curtailed
Unless you are supplying a product or service that is considered absolutely mission-critical, you should expect that revenue will be deferred for at least three months, probably longer. If your existing contracts have cancellation clauses, expect that some will be exercised.
It’s no longer business as usual for the rest of the economy. Millions of jobs may be lost in the next few months, as entire industries are devastated. The questions every startup or small business CEO needs to ask now are:
- What’s my burn rate and runway?
- What does my new business model look like?
- Is this a three-month, one-year, or three-year problem?
- What will my investors do?
Burn rate and runway
To answer the first question, take stock of your current gross burn rate: How much cash are you spending each month? How much of that goes towards fixed expenses (those you can’t change, such as rent)? And how much goes toward variable expenses (salaries, consultants, commission, travel, supplies, etc.)?
Now take a look at your bank account. See how many months your company can survive burning that amount of cash each month. This is your runway – the amount of time your company has before it runs out of money. This math works in a normal market. Unfortunately, it’s no longer a normal market. All your assumptions about customers, sales cycle and most importantly, revenue, burn rate, and runway are no longer true. If you’re a startup, you’ve likely calculated your runway to last until you raise your next round of funding. Assuming there was going to be a next round. That may no longer be true.
Your new business model
It’s the nature of startup CEOs to be optimistic, however, you need to quickly test your assumptions about customers and revenue. Next, you need to take a deep breath and try to gauge how long this problem will last. Is the shutdown of businesses going to be a temporary blip in the economy, or will it drive Nigeria into a long recession? If it’s just three months, then an immediate freeze on variable spending (hires, marketing, travel, etc.) is in order.
But if the effects are going to reverberate in the economy longer, you need to start reconfiguring your business. You need a lifeboat strategy. If you were selling online versus in-person, you may have an advantage (assuming your customers are still there). Or you could change sales strategy. Do you need to alter the product? Revise your sales revenue goals and product timelines, create a new business model and operating plan, and communicate them clearly to your investors, and then to your employees.
Remember, no winter lasts forever, and in it, smart founders and VCs will be planting the seeds for the next generation of startups.