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Startups & Covid-19

Startups: how to keep going during Covid-19

 

By Nick Miller. Nick has founded two companies, and is now building PayFit in the UK.

 

The coronavirus pandemic has hit businesses across all sectors, with its impact being felt by startups and SMEs. However, there are steps that founders can take to reduce the impact of the crisis on their fledgling company.

In such uncertain times, for many businesses, cash becomes the most important business metric to focus on. The amount of funds you have at your disposal to operate your business becomes the only tangible detail your business can rely on and the only thing you can control.

Understanding how much that is and how it measures up to the regular outgoings allows companies to calculate what their runway is. 

Most businesses in this current time will be focusing on the ways that they can extend their runway.

Long term measures: loans and investment

 Loans are a way of injecting funds into a business. Whether it be in the form of director or shareholder loans and even bank loans, they are without a shadow of a doubt the quickest and easiest way of getting a company into a more financially secure position.

The word “uncertain” embodies the problems that companies, employers and employees are facing on a daily basis. This uncertainty means that investors are likely to act with caution on any future investments. SMEs and startups are risky investments, which ultimately means that raising capital over the next few months may be harder than was initially foreseen.

With regards to investment, it’s important to understand what investors expect. This is clearly a testing time for everyone, investors included. In many ways, the current situation provides an opportunity for organisations to prove their ability to adapt under tough conditions.

When things pick up, the resilience shown by companies through this tumultuous time will illustrate to investors that there is durability and longevity to their value proposition and to the agility of the leadership team.

For companies that were expecting to receive funding, then invoking an Advance Subscription Agreement (ASA) may be worthwhile. An ASA essentially means that investors pay in advance for shares that will then be allocated at a later date. The advantage for startups or SMEs in this position is that they are able to boost their cash flow by receiving the funding immediately.

In these unprecedented times, the Government has also stepped up to the plate. The Coronavirus Business Interruption Loan Scheme is a temporary initiative that has been put in place by the British Business Bank, and the Government has also decided to defer Value Added Tax (VAT) payments for three months (20/03/2020 until 30/06/2020) for all UK businesses.

Short term measures: freezing expenses 

In addition to making large strategic decisions, there are also many short-term measures that can be put in place. An excellent place to start would be by doing three things – freezing costs; establishing which costs can be delayed; identifying what is expendable.

Filtering unnecessary expenses is not easy, and key stakeholders in organisations will have their own opinions on what they must have to perform their roles to the best of their ability.

Managing this is complicated, but not impossible. The coronavirus pandemic is unlike any problem that businesses will have ever experienced before. Items or staff that would previously have been indispensable now seem superfluous.

Everything is on the table, and should be revisited, including the terms on all contracts. Because the current situation is unprecedented, all the terms that contracts were previously negotiated on have changed, and while some may be long term contracts, others may be able to be cancelled quickly.

During a challenging financial period or during uncertain times, it’s crucial that organisations understand where they’re spending money, and what is and isn’t essential to their business.

Rent, for example, has become something of a commodity. How long this period will go on for is anyone’s guess. While conservative estimates have said until the end of May, others have said that it could take up to six months for life to return to normal.

While rent is a sunk cost at the moment, many businesses will not even fathom the idea of ending their rental agreement. However, for SMEs (small and medium enterprises) and startups who work off very tight budgets, cancelling a rental agreement in the short-term may be a great way of prolonging the runway.

Team: Furloughing staff

With regards to furloughing employees, a subject we have explored at length elsewhere, it is maybe worthwhile considering whether furloughing staff may be felt far beyond the short-term.

Staff costs are the primary expense for the vast majority of companies, and while the Coronavirus Job Retention Scheme proposes an alternative to staff redundancies, there are certain intangible elements to furloughing – e.g. how it will affect staff morale and whether it goes against the company’s culture – that will be impacted.

So many startups build their company around a set of very defined company values, which in turn, help to create the company’s culture.

For companies that are dealing with employee departures or layoffs for the first time, the premise of parting with colleagues, and often friends, may seem entirely out of context with what has previously happened in the organisation.

Nevertheless, furloughing can be a liberating experience for some; certain roles have become more or less redundant over the last few weeks.

It is key to ensure that it’s transparent and organised. Not only will this help to justify a difficult decision, but it will also help demonstrate the decision is being made in the best interests of the business.

The future: better crisis preparation and forecasting

A lot of the talk recently has focused on whether or not organisations could have been better prepared for an event of this magnitude. The obvious answer is, of course, yes.

However, apart from in a handful of industries, the vast majority of organisations will be in some way negatively impacted by coronavirus.

Relativising the situation in that context means that the notion of forecasting for an event such as this would always have been complicated.

 The current situation is evolving from day-to-day, which means that it’s difficult to make any accurate predictions. Nonetheless, a company should always look at what it would have to do to break even in a worst-case scenario.

To do this, business leaders must appreciate what they can affect under their control. The current unknowns and unpredictability mean that trying to predict anything external is more or less futile. 

Key decision-makers have to be agile, they have to adapt, and they have to understand the financial intricacies of the organisation to make bold decisions.

Just by having visibility of the cash situation and analysing each expenditure, there is enough insight to determine how far a company’s runway can be extended.

It’s apparent that coronavirus caught not just businesses off guard, but also the Government and various other public sector organisations.

Because Coronavirus is unlike anything we’ve ever seen, the organisations that adapt quickly by adjusting costs to maximise their cash available or by reallocating their expenditure more strategically, will be those that come out of this situation strongest.

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