A founder’s guide to surviving the current chaos
Amidst the COVID-19 chaos that has had a direct impact on many things, MAGNiTT CEO, Philip Bahoshy recently hosted 500 Startups’ Sharif El-Badawi for a webinar to gain his insights on how startups can get through the current crisis. With Sequoia Capital, having dubbed this year a “black swan” event in their note to portfolio, Philip and Sharif reflected upon comparable crises’ in the past, in addition to sharing tips for founders on how best to manage their companies, teams and fund raising aspirations:
Q1) You have previously had experience with “chaos”? What was it / how did you deal with it?
The first one I can remember was the dot com boom and bust in the late nineties. There were companies who raised heaps of cash but collapsed and others went into a focused quiet period. We were a 15 person team, with more than 90% revenue from services, which dried up fast and had launched a digital product, but it wasn’t big enough yet. We had to lay off everyone except me and a server and ended up selling the company for a small amount to one of my clients.
The second was the 2008 recession, which was around the time when so many great tech companies were setup. Some of these companies would have a full amount of their last round in cash in the bank and still raise their next round. VCs need to deploy, and companies with the most cash can live longer.
Q2) What are the 5 key pieces of advice that you would give to founders right now?
- Perform a detailed 360 situational analysis of how these variables will impact your business, adjust growth and earnings assumptions. Some of our portfolio companies have already sent us very detailed SWOT analyses of their businesses, which are quite impressive. Others presumably haven’t even thought about it.
- Communicate with your employees, customers and investors early and often
- Lower burn rates to conserve capital, lower risk and reduce debt
- Raise more capital than you think you need
- Focus on the core business that’s working and maintain your pipeline
Bonus: make sure you take care of your mental and physical health
Survival of the quickest - those who take big cuts early and reposition fastest have a higher chance of surviving than those that take a wait and see gradual approach.
Q3) You mention fundraising, are investors deploying capital or are they too being risk averse?
I think it’s still early to see any effect. We see existing conversations continuing, follow-on rounds should continue with more selectivity and impact forecasting. New fundraises may slow over the next 6 months and the bar will be higher, with an emphasis on the sector specific impact of the current situation. Some investors may recommend bigger raíses to weather the storm and if a company doesn’t have a long enough runway, investors may be bearish on their potential to come out the other side healthily.
Just as with markets down, right now is a good time to buy. The same applies to startups, an investor would want to put more money in while the price is low, predicting that it is undervalued and if had enough runway, could come out the other side of this a winner.
Discerning investors will identify the companies with the best attributes for the current climate and projected future; those that have or will have high demand in the market, those with little to no supply issues or some unfair advantage, those that will rebound well. Investors should be expected to start building in more downside protections, and for all those of you who have egregious investor controls that you thought “would only matter in a downside scenario”, well get ready for those to kick in.
It may also be a good time for M&A activity for buyers, due to suppressed pricing. And if you don’t have 12 months of runway, you might want to aggressively pursue an acquisition.
Q4) Would it be the right time to start fundraising?
My recommendation would be to continue fundraising if you currently are, particularly if you already have existing investors. You’ll want to ensure they have dry powder allocated for your company. If you were planning to start fundraising in the next 4-5 months, you’ll need to have a better story and traction than initially thought. Ramadan and summer are typically slow in MENA for fundraising anyway, so hopefully the impact won’t be too hard. Give yourself additional time to fundraise, if we were averaging 3-6 months before, we’d recommend thinking along a 6-9 months range.
If you’re in the top quartile of startups, you can have leverage with your investors and raise at fair terms. However, the majority of companies who’ll “need” money and aren’t oversubscribed with inbound investor interest will have a hard time.
If your startup is not cash flow positive, you’re in a tough spot right now. If you haven’t figured out your business model yet, you’re in trouble.
Q5) What are some tips on keeping costs down?
Each company has to evaluate its own runway and determine how much it needs to cut to last 9-12 months. Ideally you’d want to get to breakeven on the business from revenues so that even if you can’t fundraise, you can keep the engines running.
Q6) Will investors be understanding of the current situation?
I know we’re having conversations every day with our founders (and other VCs), and many of them are talking to each other and their investors. We don’t know what will happen, but history shows that startups that can weather the storm typically come out stronger and way ahead of their competitors. So investors will want to ensure their most promising companies continue on by supporting them and possibly reserving dry powder in case the company needs it.
On the other hand, investors have to be practical, so if a company’s prospects of survival and success are slim, it wouldn’t be prudent for an investor to put more money in unless they thought it was sufficient enough to carry the company through the crisis.
Q7) What should founders focus on in this time, growth or product?
Depends on the stage of the company, if the company is:
- Non-revenue generating: they should focus on the fastest path to revenue
- Revenue generating: focus on cash flow, generating margin and smooth revenue
Q8) Do you have any thoughts or recommendations for governments in the region now who can support entrepreneurs?
I think some of the creative measures that can ease the pressure on entrepreneurs and small business alike, are:
- Expediting certain processes;
- Reducing, delaying or eliminating fees, taxes, tariffs;
- Easing lending hurdles and extending loan terms;
- Providing stimulus packages and grants; and
- Continuing to build out Fund of Funds that can invest in VCs.
Q9) For startups that are currently hiring, should they go ahead with it or put it on hold?
Non-revenue generating: they should hire the minimum they need to get to revenue with the longest runway
Revenue generating: it depends on the type of hire. Anyone who is not directly contributing to the generation and maintenance of additional revenue in the next 3-6 months should be put on hold, keeping in mind cash flow and runway before the next fundraise and what story they will have to tell investors then.
Q10) Working from home? Yes or no? What tools do you recommend to help keep connected and keep company culture remotely?
Yes, absolutely. We’ve always been a remotely distributed team, although we have critical mass in Bahrain, Saudi and the UAE. Our staff is working from home and our programs have moved to remote learning. We use a variety of tools, and I don’t think much will change that we haven’t been doing already, such as gSuite, Zoom, Slack for remote communication and collaboration.
I see a number of remote tool recommendation lists out there for startups so I’m sure founders have a better perspective than we do. Above all, I think getting into a routine structure with scheduled check-ins and specific non-work time is important.
Q11) This is still relatively new with limited visibility on when it will stop – should we look to pivot or stay the course?
If you’re loaded with cash and what you’re doing isn’t working, then sure go ahead and pivot (or give investors their money back).
If you have something working, you might want to stay the course and milk that line of business. You may also feel it's not enough to get you to breakeven fast enough and have the urge to try something new. This can work well if you have a good grasp on running growth experiments. For example, you might identify that your company is generating revenue from episodic one-off sales, such as an advertising campaign, a sponsorship, or consulting work. These revenue sources are harder to predict and build smooth rapid growth to generate cash.
Companies that have ample cash lying around have leverage and can act swiftly in opportunistic scenarios.
Q12) You mentioned M&A is an opportunity – what would you be looking for?
If there are synergies in a combined organization that are win-win, it could make a lot of sense. My general thought on the matter is we want to encourage a more sophisticated M&A culture in the region. Smaller, single-market startups might want to consider joining forces to become a more formidable leader in their space. Larger, Series B+ companies may look to strengthen their position by acquiring smaller startups for market share, human capital or technology.
Q13) What is the investor mindset right now? Are they asking LPs for funding?
In the MENA VC world, which aligns with government and development goals, the value proposition of entrepreneurship, technology, startups and venture capital is even more pronounced so believers in the mission of the 5 years should even double down on their conviction that this is the right way to build an economy for tomorrow.
Q14) What about the stock market and oil price – how do you see this affecting sovereign wealth funds?
The SWFs we know are quite sophisticated and principled in how they allocate their capital across asset types and strategies. This just emphasized the point about the region needing to accelerate its economic diversification efforts and continue to boost entrepreneurship and innovation. I believe the stock markets will bounce back, and begin to grow again before the end of the year. Oil prices will return to their pre-C19 levels, so while the effects are extreme for the time being, I believe wealth managers will recover without much damage. The fear is for the individual, the small company, or large utility, the essential economy drivers,
More importantly, I do believe there’s some truth to the idea that life won’t completely return to pre-Corona norms. Everyone around the world has been affected and digital will have a more deeper engrained place in our lives and businesses.
Q15) Key decision makers may also have hits to their personal wealth. This may make them more emotional – how should we approach?
We can only hope that decision makers are rational in their approach to the current climate, for their personal decisions as well as business decisions that they’re responsible for. Being too pessimistic or too optimistic doesn’t help. It’s important for decision makers to take calculated approaches to risk mitigation and opportunity capture.
Missed the webinar? Access the full recording HERE
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