Startup Saturday: Ensuring cash flows in, even when people don’t go out

Updated on Mar 29, 2020 03:50 PM IST
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ByNamita Shibad

PUNE This pandemic is extracting a hard price. Not only are businesses moving from offices to operating from homes, but now the startup community has to manage another challenge – funds. Money is a vital input for any business and more so for a startup. But that is possibly one of the things along with customers and supply lines that may slip out of the equation in these Covid-19 times.

Some investors shed light on the money situation

THE INVESTORS

Padmaja Ruparel, co founder Indian Angel network

Irrespective of your size, everyone is grappling with the situation. What to do next, how long will this situation last is on everyone’s mind. Many entrepreneurs will relook at their strategies; I think we will see a paradigm shift in many businesses.

There is definitely going to be a dip in the number of transactions. While an investor looks at startups as an asset class, he will no doubt think of the companies he has already invested in. Will they need more money; will I have to extend further support? What more will the current companies need to get over this hump?

Having said that I feel companies are focused on the new imperative that this pandemic has thrown up, companies that are in Ed tech, bio tech, healthcare, online delivery, companies that focus on natural resources, agri-tech, all will see a renewed interest.

Entrepreneurs are a very resilient breed. They will quickly think up of ways to leverage their expertise and respond to the situation. One of our companies had an offline model of training – she has set up a music school. With this Covid-19 pandemic, it is not possible for them to take classes. She understood the situation and what it called for. Since she had taken money from us, she knew she had to deliver. In two weeks, she set up an online delivery model of her music class. And now has included it in her revenue model. She expects to be at 80 per cent revenues soon.

As an investor I can say that we are here to employ capital to build resources, not do philanthropy. If founders can realign their businesses to the changed situation, if they can deliver with speed, I don’t think investors will shy from getting them on board. It’s important to know that companies are capable and have responded to the new challenge. I won’t name this company just yet but just last week we closed a big deal.

Vaibha Domkundwar, founder Better Capital:

When public market tumbles, private markets tend to freeze. I believe we will see this play out in the Indian venture capital ecosystem where funding rounds will slow down, larger follow-on rounds may get pushed out and the early pre-seed rounds will be scarce as liquidity in the ecosystem dries up due to the market crash.

However, I believe in hyper realism and my recommendation to founders is that they understand this new reality and over-plan for it. If they over-plan, they will be in strong position so when things start recovering, they can double down and increase their pace. All founders should plan for an 18-month runway and prioritise revenue generation over growth alone.

When things recover and venture capital momentum returns, the best companies will get the first wave of money across all stages from pre-seed to growth.”

Manish Gandhi, managing partner, Venture Catalyst

This pandemic has caused a major economic ripple. The country could face soaring unemployment rates within the next year. It’s hard enough to raise money in a healthy economy, let alone when the stock markets are tanking globally. The stock market is at a 5-year low and that gives a lot of opportunities to investors to invest. The stock market is very bearish currently and good deals are available at good prices. Investors will no doubt seek those avenues for their money.

This translates into lesser money available to the startup community. I see VCs negotiate harder and look to get better deal flows. However, good startups will always get funded. Of course, you must note that we see about 40,000 startups a year and only 30 to 40 of them get funded.

I think probably in the short run, deal flow will slow and we’ll see it really start with some of the more strategic investors coming in. People who can add more to a business, than just cash. I think post November the situation is likely to improve.

What this translates into? I feel pre-seed and seed-stage startups with less cash in the bank, will find it almost impossible to raise an interim round, as their burn rate will increase as sales fall. It is likely to be harder than usual for these companies to gain customers, meet potential clients and start showing traction. In turn, this is likely to make it more difficult for them to raise the next round of funding

Word of advice. Startups should try to grow organically and should slow down for a while. Stop hiring till the time they don’t foresee runway, slash spending on unwanted stuff, work from home or co-working space, cut out travel, make every penny work and prepare for tough times ahead.

Success in a pandemic

Tanuja Gomes, Furtardo Music School:

When Tanuja Gomes succeeded in raising $3 million ($2 million from IAN and $1 million from Deepak Shahdadpuri) in November 2019, she did not take into account the devastating impact of the Covid-19 pandemic. “We have 150 schools that rely on our trained teachers to teach music. We also do their assessments. In addition to this, we also have students who come to our classes to learn music,” says Gomes.

Two weeks ago all this went kaput. The virus ensured parents did not send their kids for music classes. But Futardo Music School had made a commitment as per their business plans submitted to their investors. With some quick thinking Gomes asked the mothers of the kids who came for personal music lessons – would they let the children take online music class?

“Most parents agreed. If I had asked them this a month ago, I don’t think they would have agreed. However, this pandemic made it necessary that we quickly adapt to the new reality and find a way forward,” said Gomes.

Waiting for the pandemic to subside would have meant loss of an entire season. “This way we have managed to not only keep the business going but are now getting enquiries from people all over the world.” Tanuja uses Zoom to conduct online music classes. “We opted for a corporate account which cost us $200 per month. All my teachers use Zoom for their online lessons. I didn’t not have to build my own technology, I just used what was commercially available.”

In addition to offering it to private students Futardo Music School asked its schools if they would be interested in online classes. “As of now, 15 out of 150 have agreed and now we are working on that too.”

Currently Futardo Music School has 250 online students.

THE ADVISORS

Even though money may be tight, here’s what entrepreneurs can do to stay afloat. Ravi Nigam, President TiE Pune and Sanjay Sharma, co-founder Ideaction and mentor offer suggestions.

Ravi Nigam

These are truly extraordinary times, no one really prepared for this pandemic. So, no one is really sure of how to deal with this. But some things are obvious, everything has sobered down, in fact the mood is really sombre. While the pandemic has hit manufacturing, retail and entertainment industry real hard, what really stands out is everyone is so restrained.

My advice to startup founders whether they are in the early stages or have seen some traction is to conserve. Conserve your cash. If you are boot-strapped and have spends but no customers yet I would advise you to shut shop for a few months and then come back. If you are funded and have cash, I would still advise restraint. Take it slow, get a better, deeper understanding of what will work. Strategize. The tech companies have configured themselves really well. They are using technology to aid their processes and marketing and sales. Customers do no longer want to meet them personally; they’re willing to do it online. Using this downtime effectively will help put you first in line when things open up.

One hopes that this period will not last long but they will surely bring about changes in our life that may be long lasting. Health tech, Ed -tech will see a boom and we expect more and more people will get into that space.

Sanjay Sharma

How an entrepreneur responds to this situation will depend on what stage his business is in and also the size of his funding and current cash reserves. Simply put I would say look at your inflow and outflow of cash in times like these. If you are in the early stage of your business who is still acquiring its initial customer base, it makes sense to defer operations, cut down outflows and come back when the situation stabilises. In the early stages it costs Rs 100 to acquire a customer who pays you Rs 10 each month. If the customer is not reachable in such extreme distress times there is no point in keeping operations on while economic activity has shut down. The math doesn’t work. It makes more sense to shut down operations temporarily to stop bleeding and conserve resources for the early recovery signs.

In case a startup has entered the growth phase with good revenue assurance and guidance, the options are better. Such an entrepreneur has to ensure supply continuity even on a lower scale, if necessary. Even if the supply comes at a higher unit cost for a brief period, it is best to keep serviceable customers engaged without a break. Losing existing customers in a growth stage is dangerous and leads to an exponentially higher cost of re-acquiring them when normalcy returns.

The window of this economic impact would be anywhere from 3 months to one year. Even when economy picks up there may some reluctance on part of the customers to fully restart their buyer behaviour. Startups should plan for different scenarios base case, worst case and best case. They must do their financials (cash flows, most importantly) for each scenario. Second, they should identify the specific information they need to identify the scenarios, if they were to fold out, e.g., virus spread, containment, resumption of selective or sectoral activity etc. Third, they should define what decisions and actions they will take once they get this information from the environment, e.g., lay low, restart, phased scale-up. If the information suggests that the normalcy or recovery is going to take a long time, say 6-9 months, they should identify other short-term avenues to them - other customer segments, other geographies, differential pricing and the like. The key to all of these is quantification of each of the scenarios.

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