The Coronavirus COVID-19 has the potential to become the most disruptive economic event in more than 100 years. The medical impacts are tragic and the anxiety of unknown outcomes prior to containment are causing previously unseen panic and precaution.
The shock to the economy cannot be overstated. Most economists and banks agree the halting arrest of the economy in March will reflect negative US GDP growth in the first quarter. We could be facing a recession more severe than that of 2008-2009. The financial markets have already corrected more than the 1987 market crash, the crash following 9/11, and the recession after the bank and credit markets collapsed in 2009. JPMorgan updated its Q2 forecast, projecting that US GDP will shrink by 14%. At least for now, the three big investment banks — Morgan Stanley, Goldman Sachs, and JP Morgan — are projecting modest comeback growth in the 3rd calendar quarter.
Obviously, the immediate concern is to protect the health and welfare of your family, employees and yourself. Protecting your startup company is the next highest priority.
Most companies will see dramatic decreases to their revenue and cash immediately and it will be difficult to drive expenses down as quickly. You should reduce your cash burn rate immediately to mitigate losses and extend your cash runway. Many companies will be too slow to react and will fail.
Preserving cash, deferring hiring, capital expenditures, and curtailing or canceling most discretionary spending is critical. Updating cash forecasts and the company’s profit forecast on a monthly or even weekly basis will keep visibility on how much runway the company has before requiring additional equity or financial capital. Unfortunately, in times like these when startups need cash the most, the price of that capital tends to rise and the sources of that financing can be elusive.
Many venture capital firms are putting the brakes on their portfolio companies. On March 5, Sequoia Partners published their “Coronavirus: The Black Swan of 2020” blog. In it, they warn portfolio companies that funding could get much harder to raise at this critical time and funding received will come with more unfavorable terms as the VC firms attempt to mitigate their own risk.
Additionally, past and future funding will most certainly come with more oversight and restrictions to adopt business plans to every startup’s needs to conserve cash. Those that cannot adapt quickly will likely see their funding dry up. The SBA offers disaster assistance in the form of low-interest loans to small businesses impacted by declared disasters. The SBA is likely to be inundated with Covid-19 related disaster loans. The earlier applications will be processed first.
Given our current economic crisis, many startups will fail despite the government’s drive to put a $2 trillion stimulus package in place.
Actions to take: Put immediate controls in place to reduce your cash burn
- Defer all non-critical hiring. Many companies should consider immediate layoff or furlough. The alternative risk is unemployment for many more if the company doesn’t increase its cash runway.
- Defer or eliminate almost all discretionary spending (e.g., travel, new or non-critical marketing programs, conferences & trade shows, and new technology development).
- Many employers have already enabled their employees to work remotely. Those that haven’t need to put that capability in place as soon as possible. Using Zoom, Skype or comparable videoconferencing capability is critical now to connect employees.
- Require all material expenses to be approved and payments released by the CFO or CEO.
- Over-communicate with management and all employees of the Company. It will take a concerted effort and companies can leverage their critical team members to share in the effort to address the short-term challenges. Transparency is always better than the alternative.
- The CFO or Controller should immediately reach out to their vendors and negotiate lower pricing and stretch out the timing of payments. It is critical, in these times, to be transparent with your vendors. That transparency will create trust and a stronger partnership in the future.
Unfortunately, a delay in response to the economic impact of the Covid-19 virus will be very similar to the medical impact of the delay in the response to the virus itself. If you have not already taken the actions above, start immediately. If not, your startup’s cash and capital sources will dry up at an exponential pace. Like the virus, we will get through this, but the startups that ignore the call to immediate action will either be severely weakened or will not likely survive.
CFOs2GO has a strong group of seasoned CFOs who have managed through recessions and other economically disruptive events of the last three decades. We provide fractional/part-time CFO consulting to help our clients navigate these incredibly choppy waters. We are able to work with a Company’s CEO, board, or investors to put in the corrective measures immediately to help increase the cash runway.