As we saw the coronavirus situation unfolding in China and then snowballing throughout Southeast Asia, we knew from experience as investors and former operators in the region that, for some of our founders and CEOs, there would be difficult times ahead and they would need to start acting quickly and decisively.
Those who can steer with thoughtfulness and direction will demonstrate to their employees and investors their resilience and ability to withstand downturns.
At Monk’s Hill Ventures, where I am a partner, we have seen recessions in the past and have ridden these downturns as former operators and entrepreneurs ourselves in the U.S., Europe and Asia. There are three important considerations, based on our experience, for founders and CEOs to think through now: organizational adaptability; capital spending and fundraising strategies; and the operational and revenue models stress test.
Founders and CEOs need to overcommunicate and adapt their organizations swiftly to protect their employees and to ensure smooth business operations. It is critical to be decisive and provide flexible, clear and measured updates and policies to employees, and on a regular basis. This may include work from home policies, implementing tools for better remote collaboration, notices and reminders to wash hands and providing masks.
It is important to consider developing a business continuity plan that is realistic and aligned to how the situation is evolving. For example, one of our portfolio companies, C88 Financial Technologies, which builds and operates financial marketplaces, credit risk models and data services in Indonesia and Philippines, has been proactive in implementing its business continuity plan.
Under the plan, it identified four threat levels, provided an action plan for each and rolled them out across its operations. Within days of news that the coronavirus had spread, C88 implemented a Nerve Center made up of group executive leadership and management to centralize and coordinate emergency policies for their employees. This is alongside regular updates from their CEO, companywide emails and town halls.
Next for founders and CEOs is rethinking capital spending strategies and weighing top-line growth against a path to profitability. Top-line growth is not as important right now and sensible investors will value entrepreneurs who shift their focus toward optimizing for profitability and making capital last.
We ourselves have doubled down on advising our portfolio companies to focus on underlying unit economics and to be cautious with their burn rate, the rate at which a company uses its cash reserves, and cash positions, while heightening the sense of urgency.
There are additional practical learnings we can take away from previous economic downturns.
First, when it comes to cost cutting, one of the biggest mistakes we have seen founders and CEOs make is not cutting enough head count at the beginning if they need to. As difficult as it is, it is important to cut more head count rather than less, and to rehire if needed. If a company ends up reducing head count multiple times, this will damage morale and drive away high performers.
Secondly, if there are ongoing commercial partnerships or sales contracts, make concessions and close the deal as soon as possible. Lock in a longer-term contract: in an economic upturn, shorter-term contracts enable one to renegotiate prices up, so do the opposite in an economic downturn.
And thirdly, look for opportunities to take advantage of the downturn. In the past, we have seen recessions where players go out of business and there is market consolidation. Is there an opportunity now to acquire a competitor?
As a side note, capital-raising strategies may need to change as fundraising might slow down over the coming months. With international travel curtailed and face-to-face meetings difficult to arrange, founders will have to rethink how they interact with investors and how best to sell their story as investors become selective. However, if there is a good opportunity to raise now, raise more than intended as a protective measure.
Finally, the stress tests. There is much uncertainty on how consumer behavior will change over the next few months. This means founders and CEOs need to challenge their underlying assumptions when it comes to their revenue and operating models.
Companies may see a spike in demand or a decrease in demand depending on their industry. For example, another portfolio company, Padlet, a productivity tool widely adopted in the education industry, saw increased demand recently likely because of more students using remote learning.
Look for opportunities to take advantage of the downturn. (screenshot of Padlet’s product)
For companies that are seeing a spike, now is not the time to increase fixed costs to meet the demand. Instead, founders should come up with creative, flexible ways to scale up and down their capacity to meet demand while remaining nimble for when the tides change.
As VC investors, we see the ability of a founder and CEO to navigate coronavirus as an ultimate stress test. We don’t know how long coronavirus will last, though likely longer than one may expect. They say we learn our best lessons in times of crisis, and our three considerations are lessons from our own past, which I hope will serve well not just in bad times but good as well.
Source: Nikkei Asian Review