How start-ups can survive the financial crisis

David Abikzir

Start-ups are the lungs of the Indian economy and viewed as a propellent for the country’s growth and a contributor to India’s vision of being Aatmanirbhar but the COVID-19 crisis is posing a challenge to their creation, survival, and growth.

The start-up culture in India today has created more than 5 lakh jobs, with 50,000+ start-ups and 40+ unicorns, leading India to become have the third largest start-up ecosystem in the world. It is projected that by 2025, India may well have 1,50,000+ start-ups, employ 4+ million, and produce 100+ unicorns, with a total market value north of $500 billion.

In this unprecedented time, 70% of India’s start-ups have been negatively impacted by the pandemic. And over 15% have shut down their operation. Unfortunately the PE funds’ immediate focus is to stabilise existing portfolios and  the majority of PE firms do not plan to execute any new strategies over the next six months in this unstable market.

Despite this catastrophic situation, start-ups can remain optimistic to turn around their business on the digital space and create news markets with growing perspectives raising capital strategy in the next 6 months.

1.    Recognise the opportunities highlighted in time of crisis

 Many successful innovative start-ups and businesses have emerged from periods of crisis. Some notable examples are Dropbox, Uber, Airbnb, WhatsApp, Groupon, and Pinterest. This confirms that periods of crisis are not only a challenge, but also provide new opportunities for entrepreneurship.

First, there are abundant opportunities for start-ups that introduce (or upscale) radical innovations. These innovations could be in tele-medicine, remote personal care, medical equipment, home delivery, food processing, teleworking, online education, contact tracing.  Second, and importantly, the COVID-19 outbreak has changed societies, consumer habits and needs that has uncovered valuable business opportunities for start-ups that are able to anticipate these changes. For example, remote working, e-commerce, education and health services. And lastly, the COVID-19 crisis has accelerated the digitization of customer interactions by several years. Start-ups must speedup in creating digital or digitally enhanced offerings and must refocus their offerings.

 2.    Defeat the short-term challenges

 A start-up must have a clear picture of where it stands financially by conducting a proper assessment of their fixed and variable expenses as well as the actual revenues. This will help the entrepreneurs in planning ahead in the current disconcerted market. It is also crucial to track current financial metrics and cash flow. Start-ups need to be mindful of what their runway is.

As, it is uncertain how long this pandemic might continue, it is imperative to be prepared for all scenarios. An instant halt on variable expenditures like hiring, marketing, travel, etc. can help in the short term perspective. However, in the long term perspective, entrepreneurs might have to reconfigure their business strategy to reduce the variable expenses, renegotiate fixed expenses, and focus only on the crucial essentials for survival. Business will also have to switch over to selling online versus in-person, and analyse if they need to cut back or scale up on marketing costs.

Every business is questioning where they will get the capital from. There are many funds who have enough capital to invest for the coming years. They will be more vigilant and may take longer than usual to make funding decisions. However, there is nothing to worry about as history has shown the markets eventually bounce back after the end of an epidemic crisis. In order to extend the runway, businesses can approach  their existing investors for additional funding. They are more likely to help out during this time as they have already invested and have their skin in the game.

3. Cash is key

 CEOs and CFOs response to the COVID-19 crisis was all about survival: freeing up cash and resources to keep the lights on and the doors open. Start-ups to rushed toward cash and liquidity to keep operations going. A silver lining to the crisis is that it revealed the critical importance of cash excellence — a set of best practices that enable prudent cash and liquidity management. In extraordinary times, extra cash can prevent a company from going bankrupt.

To have a successful turnaround during this crisis time primarily depends on cash and cash returns. Is the business generating cash or burning it? And, even more specifically, the basic elements, which part of the business is generating or burning cash? When you bring a business back to those basic elements, the actions required to get back on track become pretty clear. In many of the situations, the management team might be focused on complex metrics related to EBIT and ROI that exclude major uses of cash. Keeping track of cash is more than just watching your bank balance. In order to avoid surprises, startups also need a good forecast that keeps a midterm and long term. Failing to pay attention to the cash component of capital investments routinely gets start-ups in trouble.

 4.    Focus on a great change story

Start-ups in distress need to focus on creating a change story that everyone understands and that will also create some sense of urgency. During this COVID pandemic, digital transformation is the story which has to be part of your narrative for the investors. The traditional business is overwhelmed, but must be presented as a legacy to operate a successful digital transformation or expansion, if the turnaround has been already done.

This digital change highlights a company’s capacity to develop new markets, challenge your business model to acquire market share and showcase the value creation of your business in front of potential investors.

The story of your brand is what matters in your narrative for a change. Talking about transformation can mean an on-going process; but the ‘poetry’ around expansion can signify that the transformation has been already operated and now you are seeking for value growth, this is the music which sounds good in the investors’ ears!

 5.    Take quick actions to build traction

 To turn a company around, most managers tend to put all of their focus and resources into three or four big bets. This approach might have a high-risk. Although big bets are sometimes necessary, they require lot of time and effort — and they might not always pay off.

Managers must also focus on getting a series of quick wins . This will help them gain traction within the organization. These quick wins can be cost focused, cutting off demand for some external service they don’t require, or even policy focused.

Such moves also generate support among employees. Most of the time at least a fifth of employees across the organization are almost always supportive. They are hard workers, and they will change what they’re doing if you just ask them. The remaining 60 per cent of the organisation have fence-sitters. They notice the changes, and if you proactively work with them, then 80 per cent of the organisation will supportive. However, if you don’t give them a valid reason to stand up and be positive about the company, they’ll go negative. This is the importance of quick wins.

 The writer Chief Investment Officer and Executive Director of Jupiter Capital, Bengaluru