March 30, 2020 | 4-minute read (764 words)
COVID-19 has wreaked havoc on nearly every aspect of the world economy. Small brick and mortar businesses like your local pizzeria may be forced to close their doors for good. Publicly traded blue-chip companies are facing capital constraints and have been choosing to draw down on their revolvers. The list goes on and on.
Startups aren’t immune to the challenges created by this global pandemic. Whether a startup has just received its first seed round or was thinking of going public before this financial crisis, all founders in the startup world need to take decisive action. Doing so, they can better mitigate the near-term economic impact of the coronavirus and be well-prepared to capitalize on normalcy when it arrives.
Blunting the Effects of COVID-19
One of the first and most important things that startups should look at is their current cash situation. Cash flow is important in “normal” times, but it is especially important during periods of economic turmoil. For as big as a startup’s potential is or how much its users love the product, cash is the oxygen that keeps a startup going.
Because of this, startups need to figure out their cash needs for the foreseeable future. Yes, making projections is always difficult. That said, if startups believe that they are going to face a significant cash crunch in the next few weeks, they must take action now. This can mean everything from searching for emergency funding to extending their runways to laying off a certain number of people. These are obviously painful choices, but startups need to prioritize the long-term survival of the business.
On the other hand, if a startup is consistently generating positive free cash flow, it is in a good position to ride out this crisis. Again, they will need to be conservative, but positive cash flow is a godsend in times like these. After taking care of their fixed costs and employee salaries, they should be looking for opportunities to deploy that cash (with the caveat that conservatism rules the day here).
From monitoring cash, startups should leverage the inherent advantages that startups have. There are plenty of advantages. The nimble nature of startups allows them to quickly pursue opportunities that have been created by the coronavirus. Startups also offer the advantage of flexibility and remote working opportunities. Because of this, some startups won’t need to drastically cut back hours since most (if not all) employees can work from home. Startups should also compel employees to rest up and avoid going to the office if they are sick.
Next, this is a great time for startup founders to speak with their investors and mentors. Investors and mentors can be your guides in times of uncertainty. While all of us are going through a global pandemic for the first time, investors and mentors have likely already experienced extreme economic turmoil. Whether it is the bursting of the dot com bubble, the global financial crisis, or something else, they likely have a wealth of insights about how to lead a startup through turbulent times. Startups should rely on these insights as they craft their own strategies here.
Finally, startup founders should not panic. They should act swiftly, but out of rational, deliberate thought. One of the worst things startup founders can do is instill panic within their team. Doing so leads to poor decision-making and more short-term and long-term pain. Startup founders need to recognize that this turmoil will pass. It isn’t permanent. In the meantime, practicing self-care and maintaining perspective can go a long way in pressing on amidst this uncertainty.
Acting Swiftly and Decisively
COVID-19 is a major test for businesses of all shapes and sizes. Nevertheless, startups have no choice but to react to the challenges in front of it.
Yes, the challenge is difficult. In all likelihood, the next few weeks will be extremely difficult. That said, startup founders contribute the most value by operating in extremely uncertain conditions. While the task is large, it certainly isn’t impossible. In fact, founders that are proactive and implement some of the suggestions above will be in a great position once the threat of COVID-19 subsides.
About Early Growth
For over 10 years, Early Growth has provided early-stage companies CFO Consulting Services, Accounting for Startups, Taxes, and 409a Valuation. We saw a need in the marketplace for a service that would allow founders to still focus on business while building a healthy financial story. Our Outsourced CFO, Outsourced Accounting, and R&D Credits services have helped many companies grow.