Running a startup company is a damn hard thing. However, in times of crises it becomes a question of bare survival with any means. The Corona pandemic is a serious crisis and it will impact your startup.
During the 2008 financial crisis we were in a similar situation with our startup kooaba. Actually, when it hit, we were in a due diligence phase with a potential acquirer. They suddenly faced financial challenges themselves and drew back. We ended up running out of cash and it was impossible to raise any money as most investors stopped all activities. Moreover, we still had to pay the horrendous fees of our lawyer firm for the due diligence. We faced nine months of bare survival. Thanks to a great team and a lot of luck, we managed to raise the necessary cash in the very last minute to carry on. Kooaba bedame a success and was acquired early 2014 by Qualcomm and is today part of the AR platform Vuforia.
In this post, I want to share some options for startups in times of crises. Some of them we applied ourselves, others I observed in other startups.
Cash is the fuel of a company. When a startup runs out of cash, it will have to stop operating and is doomed to close its doors. A crisis is — per definition — “a time of intense difficulty or danger”. Nobody knows how long it will last and how bad it will get. Therefore, startups need to react as soon and as resolutely as possible in order to survive. Now we are in such a situation. The Corona virus kills people and it will kill companies. Therefore, foremost make sure to stay healthy. Then you need to do everything possible to reduce cash burn and maximize revenue to keep your company afloat until the market gets better. Below, I summarized some measures we took and others I observed in other startups back in 2008.
Reduce cash burn:
- Stop paying bills immediately (except for social insurance fees for your employees). This is the easiest and most short-term measure you can take. Of course you will have to pay the bills someday, but maybe the situation looks better already in a couple of weeks and the markets recover.
- Apply for short-time work (Kurzarbeit, Réduction de l’horaire de travail). If there is a lack of work, you can temporarily reduce or cancel your employees’ working hours. Your company only pays a part of the salary and the state compensates for the whole or parts of the rest (in Switzerland 80%). The good thing is that you keep your staff. The bad thing is that they actually have to work less. Therefore, it’s not just to pay less for a full-time resource.
- Reduce salaries. This is more a credit from your employees rather than really reducing salaries. Ask your team if they are ok to pay them less salary for the coming months and that you will reimburse everything once the crisis is over. You will need written consent and it’s a great commitment from each individual employee. Still, you will have to pay social insurance for the full salary. Founders could go as far as reducing their personal spendings (e.g. move back to their parents) and put every dollar they have in the company.
- For ETH spin-off companies, you might be able to temporarily change the contracts of some employees to ETH contracts. This makes sense for research and postdoctoral stuff. Your employees will have to work for ETH, but you won’t lose them.
- Reducing headcount. This is the last measure, but you might have to take it. Better earlier than when it’s too late. It’s hard to let go of good employees, but they will understand and if you’re lucky, you can hire them back after the crisis.
- Get a job. If you are in an early stage of the company, it’s possible to get a job. I saw this many times when founders took a dayjob for the sake of the company’s survival. They worked on their startups during their spare time until times got better. If you’re in an early stage, consider looking for a job.
Maximize cash influx:
- Always Be Closing. If you already have a sellable product and your market is not negatively influenced by the pandemy, focus on sales. I saw companies that put the whole team, including all developers, on sales. Everyone had to pick up the phone and call prospects.
- Credit from customers. Ask your customers to pay in advance. This one you can use even if you don’t have a product yet. Take pre-orders. It’s a risky thing, but it’s better than closing the doors.
- Start consulting or other activities to drive short-term revenue. If your product is not yet in a sellable state, go for consulting assignments. This might give you the necessary time to survive the crisis.
- Sell company assets (computers, machines, equipment) and rent them in the meantime. It’s not much, but it might just give you this extra month.
- Startup competitions. Take part in every startup competition where you can win cash. It might take some time, but sometimes you’re lucky and win it just in time. (Editor’s note: Find our awards list here”)
- Bridge round with existing investors. If you already have investors, ask them for a bridge round. Fastest is a credit.
- Friends and family round. Explain the situation to your friends and family and ask for their support. Again, fastest is a credit.
- Foundations can be a faster source of cash than equity investments. (Editor’s note: Find our grants and loans list here)
- Bank credits. They might be harder to get now, but they are often easier and faster than equity investments.
- Hope this helps to give you one idea or the other. Try everything you can to survive as long as you can. Crises separate the sheep from the goats. Make sure you increase the chances of success with everything you do. It’s time to switch to wartime CEO.
Good luck and stay healthy!