The COVID19 virus pandemic has shaken up the world and may change our way of living, our work, and private lives forever. Everything is uncertain now and will be for many months to come. How can you weather out this “perfect storm” and survive as an entrepreneur?
Probably the most creative and diligent entrepreneurs have the best chance to ride it out. Companies who sit back and let it all happen, will probably disappear. Every major disaster, economic or natural, has caused a “cleansing” of the system. Think of the 9-11 disaster and the financial crisis in 2008.
Not all companies / branches will get hit. If your company can ride out the storm from a healthy cash position, contracts that include recurring revenue, customers that are large, have a continuing cash flow from their products or service, then you could limit the damage by implementing a degree of the measures below. Only a few companies will be able to grow as a result of the current situation; if you are in e-Health, Online collaboration, Telecom or Pharma, for example, you may have an opportunity to get a boost out of this.
So if you are cash flow negative, you’re “burning money” and your “burn rate” is such that you will only last a couple of months before you fail to pay your taxes, wages and suppliers. What can you do to reduce your burn rate dramatically and bring your company in “Hibernation State”: a state in which you pause all non-vital activities within your company – for as long as it takes! In the meantime, you have to come up with a strategy for the “Day After” and if there are still customers left, take good care of them to keep them on board.
How to reach Hibernation State:
- Cash is King! Forget about forecasts, what is your real cash in, cash out and money in the bank. If you are cash flow positive, you should have a fair chance going forward. If you are cash flow negative, you have to calculate your months or days left…and take action.
- Reduce your costs as quickly as possible. Some costs will continue to occur because there are cancellation periods, obligations, regulations, etc. Do you need all that office space or should you convert to a “work from home and rent meeting rooms” kind of company for now? Are there rental or service contracts that can be cancelled?
- Get on top of your outstanding invoices. Ask your customers (especially corporates) to at least pay on time, or perhaps they could expedite payment? Are there any customers that got in trouble themselves?
- Stop spending! This seems obvious, but there are many cases where companies try to portray a “business as usual” attitude and buy that latest gadget.
- Reduce your workforce. This is the most painful one, but it’s also the most effective. Basically you should scale down to the core founders team and key employees (usually only 1-2) provided that there is still some turnover left to pay those salaries and/or you can apply for special government COVID19 support regulations.
- Do you need people to operate business? Try to hire them on “special conditions” like zero-hour contracts. One could argue that this shifts the burden to the employees, but without these arrangements the company is most likely to go bankrupt and employees will lose the chance to be rehired anyway!
- Now that you have scaled down to the bare minimum, rearrange the tasks for your founding team. Focus on the recovery period while serving those customers that do provide turnover and provide all the essentials to keep them on board.
- Create a business plan for the “day after”. The business environment will likely look very different than before the crisis. Will there be demand for your services or products in the “new now”? Will people work from home more than they work in office buildings? Will travelling be really necessary and appropriate? Can you provide a new service or system that uses tele-presence, remote control, over-the-air updating? Is your current pricing structure and revenue model still valid in the new society?
Examples:
Some 8 years ago, a small company provided services to Universities. Business went well and the company grew to employ 35 people, most young, fresh-out-of-university students, led by 3 founders. Then their market was disrupted by a combination of sudden competition, pricing pressure, and a change in the university buying regulations. Sales dried up unexpectedly and quickly, but the founders reacted swiftly.
They let go of all but 2 programmers. They formed a programming team of 4, leaving one founder left to develop the market for a new variant of their old product. They succeeded in the end, building the company back to its original size and becoming a world player today.
All over the world companies react, reducing their expenses and finding new ways of still selling their product. No time to waste! Hibernate now and prepare your company for a new future.
Links:
To read in more detail about scaling down your company in hard times, go to:
- Steve Blank: The Viral Survival Strategy for Startups
- VC Firm Sequoia’s Nuanced Message: A ‘Black Swan’ In 2020 Versus ‘RIP Good Times’ In 2008
- Paul Graham, YCombinator (2007!): How Not To Die
- Specific measures for startups based in Holland
“Stay healthy, keep your company healthy, and put a dent in the world.” (Sequoia)
Masters of Scale is a brand new service for (up) scaling companies. In the coming weeks we will be working on hosting digital meetups, free of charge. We are committed to helping businesses grow, even during these challenging times. Follow our website and social media for details.