An Overview
Entrepreneurs are one of the professional groups with more skills and competencies to manage this crisis. You know what a roller coaster the life of an entrepreneur is. You already manage uncertainty, sometimes defeat, and you have experienced the constant and active search for opportunities.
True, this doesn’t mean you have experience of crisis management of Covid-19 dimensions, but you have a base which will now be very important. This crisis changes all scenarios and is very asymmetric as it affects each person and project unequally. It requires individual recipes for each start up. Everyone has to make their own decisions.
There is a short term dimension conditioned by the cash flow (Cash is King) and a medium-term dimension conditioned by the strategic aspect or what strategic will become in a new world. It is impossible to foresee how the startup ecosystem will suffer. The 2008 crisis is now being reviewed, it’s not a great reference but it’s the best we have. In that crisis access to venture capital became more difficult, although it later recovered well. So, it makes perfect sense to think that for a time it will be more difficult to tackle rounds and defend ratings.
The conclusion is develop a plan that minimizes the burn rate, selectively cutting costs by minimizing damage and seeing if there are any formulas for generating extra income. In many cases there are and you have to explore them all.
Crisis Management: Building Your Plan
Every startup must have a Crisis Management Plan that contemplates 3 scenarios of severity (low, medium high), resulting in a risk identification, a risk mitigation and implementation measures. In these measures, it is important to balance the short term with the medium term. You have to understand what impact the short term cutback will have in terms of the destruction of strategic value. Balancing cash flow and value is key.
It is fundamental that if there are cutbacks in terms of people, you do them well. Some of them will stay but for those who go, there may come a time when you will need their expertise again when the crisis is over, or maybe not. You can’t make any promises. Put yourself in their shoes and manage communication well (you will need a plan for this). People will be thinking about the impact this could have on them, so you need to minimalize any rumours which may spread.
A Closer Look at Specific Risks
Risk of a fall in cash flow
You have to understand the burn rate really well, the cash you currently have and how many months it will last. You have to make a new forecast. My recommendation is to make three scenarios, from the least impact to the greatest impact as mentioned above. Each scenario with additional revenue measures and selective expenditure reduction.
Risk of delaying future rounds or not closing the current ones
Integrate this variable in the previous exercise. With regard to future rounds, at this moment nothing can be done and for the current rounds (those of you who have them), try to close them as soon as possible and evaluate if an extra discount is needed. If so, do not let the investors perceive a situation of panic or need (they will not invest). Let them see the opportunity to get in with an additional discount on a great project that will look even better once everything has passed. It is in times of crisis that the best investments are made with a long term vision that only those who invest in startups have.
Risk of discontinuing sales or services
The reasons can be multiple: legal, lack of components (for those who work with hardware), lack of key personnel, impossibility to carry out the service, etc. Note every risk your plan may have.
Risk of stopping product/platform/improvement or development
Unlike traditional companies, all startups devote many or the most resources to improve their core assets and that’s why you have a roadmap. The lack of resources will slow down the process. In the exercise of reducing expenses, you need to really understand the cost there will be on slowing down developments.
Risk of cancelling/postponing initiatives
It may be about launching new products, a new service, a new city or market. Conditions have changed a lot and it has to be assessed whether or not we can devise new initiatives that do need to be launched. For me, this last part seems very important and for several of you I know that opportunities are now opening up that could mean accelerating initiatives.
Risk of loss of Engagement
This is fundamental and is often forgotten with disastrous consequences. You should recognize that certain team members have high levels of commitment. If you get dismissals wrong you can destroy the passion, commitment and dedication of key team members. You must communicate well, and in an honest and transparent way. There’s a lot to be said for keeping in mind the feelings and mood of your employees, especially the key ones.
Reputational Risk
It depends on the current state of your brand and the values it transmits. Today any error that is openly known can erode the credibility of your project, whether it be with customers, partners, distributors or authorities.
A Summary
I tried to include the main risks above. As you can see, you can act on a specific risk, but since everything is interrelated, it may have an effect on other risks. We can minimize cash flow risks and increase engagement risks or other risks of a more strategic nature. Therefore, putting them all together and understanding how they connect is very important.
My final comment, is that you do not forget the opportunities and your reason for being, your purpose. Of course, you need to face the current risks that for many may be quite extreme, but if you have a mission of improvement with something disruptive, this is where your value lies. The bottom line is that your project can contribute to making a better world.
Thanks to Luis Bonell for this detailed and insightful article.
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