The spread of COVID-19 has drastically altered the world in a short amount of time, upending the lives of millions of people and putting the global economy at a standstill. Startups have not been spared. While startups are often nimble organizations able to adjust to conditions like virtual work easier than large companies, they are more at risk from economic downturn and market volatility. At Blu, our partners have experience leading companies through tumultuous periods spanning the past few decades, such as the burst of the dot-com bubble in 1999, the September 11 attacks in 2001, and the 2008 global financial crisis. We asked the partners at Blu to provide their insights on what companies can be doing now to ensure they survive the current crisis.
From our discussions, we drew five major actions that startups should take now to ensure their success in the future.
1. TAKE CARE OF YOUR EMPLOYEES
Organizations are nothing without people, and the same is true for startups. Treating employees with respect and dignity should be the top priority of any company. This is especially true during a global health crisis in which the health of your employees and their families is under threat. Before you do anything else, be sure that you have done everything in your power to ensure the safety of your employees.
Michael Sutton, former CISO at Zscaler, a company that has pioneered the Security-as-a-Service space, says, “First and foremost, make sure your employees are safe. And make sure that you understand their situation, what their needs are, and what they need to do to keep their families safe. People need to put their own safety and family safety ahead of the company. Give them the ability to do that.”
Treating your employees right cannot be reiterated enough, since the actions you take in difficult times will often define your company’s culture going forward. You must inspire trust, compassion, stability, and hope. This becomes especially true if you must make one of the most difficult decisions — employee layoffs.
No founder or CEO ever wants to be in the situation where they must let employees go. Unfortunately, during times of economic recession, layoffs and salary reductions quickly become unavoidable. This is when it becomes evermore important to treat your employees with respect and to be open and honest about the reasons for a layoff or salary reduction.
Bob Struble, CEO of Directed, the largest North American designer and marketer of consumer-branded vehicle security and remote start systems, says, “If you have to lay off employees, I would recommend to all CEOs, help them out in whatever way you can. It can be LinkedIn recommendations, letters or calls of recommendation, or helping them strategize with their resume.” This is not only for the benefit of the employees, but also for the reputation of the company. He adds, “It always comes back to pay benefits. And it means a lot to the people that are still onboard, as they are looking at how you're treating people. If you must make tough decisions, treat people with dignity, respect, and humanity.”
Emphasizing this point, Tarun Upaday, former co-founder and CTO at hCentive, a health insurance software company acquired by Optum, says, “I'm telling companies to try to extend the health insurance benefits of employees you let go for at least the next three months.” Measures like this will prove invaluable later to the reputation of your company and help avoid burning bridges that could be essential to your success later.
2. EXTEND YOUR CASH RUNWAY
It cannot be overstated how important it is for startups to reduce their burn rates (the rate at which a company spends its venture capital to finance overhead) and extend their runways as far out as possible. This inevitably will lead to difficult decisions about making cuts to spending. The low hanging fruit during COVID-19 includes expenses like travel and direct face-to-face marketing, but the hard decisions will concern salaries, staff, and other operational costs. While these types of decisions may seem antithetical to the survival of your company, they are essential to getting through periods of low cash inflow. The short-term survival of your company must become your sole focus. But through sleepless nights, long hours, and uncomfortable decisions, you will find you and your company on the other side of the crisis with new opportunities for growth.
“Cut now and cut deep,” says Denis Seynhaeve, chairman and CEO of 3CLogic, a cloud contact center platform modernizing enterprise communications. “Unfortunately, the reality for many companies will be a day-to-day triage to stay afloat. And the sooner you can make the big cuts, the longer you will be able to extend your runway and better position your company for survival.”
While raising new capital may be tempting in these times to extend your runway, Dendy Young, former CEO of enterprise services and solutions provider GTSI Corp, recommends against it unless the capital is essential to survival since the terms will often cost you significant ownership of your company. He says, “Do what you have to do to survive, that's the critical mission here for all CEOs. It is not success but survival. The way to survive is to reduce your expenses to match your revenue. A company I invested in made it through the dot-com bubble by taking this advice, although reluctantly, and became a billion-dollar company on the other side.”
What can companies do to understand how much they will need to cut their burn rates?
“One of the biggest challenges is managing your burn rate,” says Mike Kostoff, founder and managing partner of The Kostoff Group LLC, an advisory firm focusing on wealth management, private banking, and retirement services. Mike suggests taking the time to build financial models for projecting different cash scenarios that could face your company in the coming months. “Scenario planning can be a very important tool. Model the worst case, such as no more new revenue for the next six months, the best case, and then the expected case. This will give you a range of outcomes that you can plan for.”
3. PRESERVE THE RELATIONSHIPS WITH YOUR CLIENTS
Crises offer an opportunity to build and maintain a lasting relationship with each of your clients. Many of your customers will also be facing difficult times, but if you can communicate with them regularly about the issues you are facing and listen to their problems, you may be able to develop relationships that will go far beyond the next few months.
“You need to be in touch with all your clients to understand where they're at and how you can help,” says Mike Kostoff. “Because if you can help them during their darkest hour, they'll be loyal to you forever.”
In the short-term, maintaining revenue will of course be vital to extending your runway. “Customer service is directly tied to your sales,” says Tarun Upaday. “And your customers need to have confidence in your company’s survival. So be sure to retain the customer service employees that can send the right signal to your customers that this company is there for the long haul, and you’re not thinking of closing shop.”
4. UNDERSTAND YOUR SUPPLY CHAIN AND INTERNAL PROCESSES
Crises like COVID-19 are also disruptive to the supply chains and processes essential to business. Certain suppliers or contractors that you rely on may not be able to function normally during this time, so you will need to think through backup solutions to your supply chain. Furthermore, your business may be exposed to additional risks, like cyber threats, if you have moved all office communication to virtual work. Act now to protect your company from these disruptions.
“It's better to have multiple alternatives if there are problems,” says Hal Shelton, former CFO & SVP for USEC Inc., a NYSE-listed alternative energy company. “Ask yourself, can you meet your milestones if a major link in your supply chain fails?”
“If you have suppliers that you're counting on,” says Michael Sutton, “You may not be able to rely on them. For example, if you're ordering parts from China, well, maybe something that took two weeks to receive will suddenly take six weeks. So, it's very important to come up with contingencies: find additional suppliers who may be able to fill the gap or find a location that isn’t as impacted at this time.”
Michael adds that it is “very important that you look at all of your human processes and all of your workflow and make sure that you don't have any bottlenecks. Do not have just one person who is the only person who knows how to do X, which can be especially true in startups where staff is limited.”
It is also important to consider who the key personnel of your company are in terms of future growth. “The first calculation for a CEO is who are my critical employees, regardless of how much money they are making now. In the long run, who do I need to retain for this company to be successful after this crisis?” says Tarun Upaday.
If you are faced with a situation where you’re forced to make layoffs, this becomes a critical point and another reason to promote respectful and honest communications with your employees. You do not want to be laying off resentful employees who may have sole knowledge of important processes to your company.
5. KNOW YOUR BANK
The small business aid program recently passed by Congress in the CARES Act makes this last point particularly important since the loans are managed by private banks. With the help of their banks, startups should be looking at payroll loans, forgivable loans to small businesses hurt by the coronavirus fallout.
“If your bank is an SBA provider, then you can work with your bank to get a payroll loan,” says Bob Struble, “This will cover your payroll, rent, and utilities, really all aspects of the business if you're able to get it. And if you follow the requirements, you can have this loan forgiven as a grant. I would encourage each company to get in touch with their banker and figure out how they qualify, and then to close quickly, because even though it is a 450-billion-dollar rescue package, it could go quickly.”
Additionally, if your company enters financial stress, having clear lines of communications with your bank will allow you to quickly analyze your financial options. In economically stressful times, having these relationships built early will be valuable later on when you are in need of quick answers and options.
THE GUIDING PRINCIPLE: BE A LEADER AND COMMUNICATE
The key strategy through all these points is communication. As Dendy Young emphasizes, “Communicate, communicate, communicate. Communicate to your employees, your customers, your stakeholders, and your investors.”
Communication can be crucial to encouraging the collaboration necessary to overcome ongoing challenges. “It’s really important as leaders of these companies that they project an optimistic message, but also a truthful and honest one, because that will encourage broad participation in finding solutions,” says Joe Callanan, co-owner of materials manufacturing companies SSi Custom Plastics and Rowe Industries. “A lot of entrepreneurs try to keep it on themselves rather than getting help from their teams, and they should be working to not make themselves the only answer to the problem.”
Communicating truthfully and frequently with everyone involved with your company will make difficult decisions easier. It will keep your employees and stakeholders confident in your abilities as a leader and in the company’s success. And in tough times, collective confidence in the future of your company will be a driving force for its success.